Community Investor MarApr 2014 by Springboard Creative

INSIDE

You, Inc. Three Ways to

Be a Better Entrepreneur

The Next Big Thing How

to Find Great Investments

MAR APR

2014

Living the Lesson Cincinnati Stateâ&#x20AC;&#x2122;s JIM WOOD brings the real world of real estate into the classroom.

www.communityinvestor.com

Deal The Secret to Seller Financing

TABLE OF CONTENTS 12

FINANCE

21 Collateral Damage Dodd-Frank could harm good borrowers in tough situations.

INVESTMENT STRATEGY The Opportunity in Extremely Undervalued Assets

DEAL

28 Selling the Seller Logic isn’t always the deciding factor in seller financing.

Don’t fight the wave, ride it. By Eddie Speed and Kevin Shortle

LAW

30 The Real Impact

of the JOBS Act It covers so much more than crowdfunding.

The Next

BIG THING

NEW KID ON THE BLOCK

34 The Tortoise, the

If you want to keep finding great opportunities, you need a system.

Hare and the Tenant “Low and steady” might just help you win the race.

By Julius A. Karash

PROBLEM SOLVERS

36 A Closer Look at Crooks Where is the best place to station a security camera?

PROTECTING YOUR INVESTMENT A Prohibitively Expensive Mistake

IN-DEPTH

44 Built to Scale The smartest entrepreneurs create businesses that are capable of big growth.

How to destroy your self-directed IRA with a single gallon of paint. By Bryan Ellis

INSIDE

You, Inc. Three Ways to

p Be a Better Entrepreneur

The Next Big Thing How to Find Great Investments

MAR APR

2014

Living the Lesson Cincinnati State's JIM WOOD

has found success as an investor and an educator.

Jim Wood Cincinnati State Cincinnati, OH

Community Investor mar/apr 2014

Deal The Secret to Seller Financingg

ON THE COVER

DEPARTMENTS

‘He’s Always Been a Mentor’

06 From the Publisher

Educator-investor Jim Wood teaches young people to be entrepreneurs.

08 News Briefs 1 1 At a Glance 49 Photo Page

www.communityinvestormedia.com

PUBLISHER R. Michael Wrenn ADVERTISING & SALES Chris Zinn National Vice President of Advertising Sales ACCOUNTING Becky Cole Vice President/Controller EDITORIAL Susan Anderson Supervising Editor James Hart Managing Editor Brian McTavish Senior Writer

le!

countab Hold them ac

PRODUCTION Carolyn Addington Production and Traffic Manager Jen Ross Graphic Designer Kevin Fullerton Design Consultant RADIO Larry Muck Host, Community Investor Radio Mary McKenna Executive Producer GUEST WRITERS Bryan Ellis, Julius A. Karash, Mark Nagy, Desirée Patno, Shane Sauer, Kevin Shortle, Jillian Sidoti, Eddie Speed 7509 N.W. Tiffany Springs Parkway, Suite 200 Kansas City, MO 64153 (816) 398-4070 editor@communityinvestormedia.com sales@communityinvestormedia.com www.communityinvestor.com Copyright © 2014, Community Investor Media. All rights reserved. The information gathered and opinions expressed by the authors are intended to communicate information and are not necessarily the views of this publication. The intent of this publication is to provide the residential real estate investment industry with information and interesting articles and news. These articles, and any opinions expressed in them, are for general information only and are not intended to provide specific advice or recommendations for any individual or business. Appropriate legal, accounting, financial or medical advice or other expert assistance should always be sought from a competent professional. We are not responsible for the content of any paid advertisements. Reproduction or use, without permission, of editorial or graphic content, in any manner is prohibited. Community Investor magazine is published six times a year by Community Investor Media.

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FROM THE PUBLISHER

eing an entrepreneur and an investor is an amazing life, but you have to wonder sometimes if the risk and the uncertainty are worth it—especially after a brutal winter like this past one. It’s hard to be optimistic when you get a call at 5 a.m. about the frozen pipes in a nowflooded property. Times like those, being an entrepreneur doesn’t feel terrific. To be blunt, it can feel pretty damn lonely. The owners of this publication have been in your shoes— hundreds of times, in fact. The good news is that you can get through the challenging times, just like we and a legion of

other investors have. The whole purpose of Community Investor is to share expert knowledge that will help you succeed. We’re aiming for nothing less than the revival of the great American dream for you and thousands of other entrepreneurial investors. So, how do we do that? Start by investing in yourself. Take the time to gain more knowledge and sharpen your skills on a regular basis. This issue you hold in your hands, filled with ideas and information from seasoned investors, can help you. If you’re a novice investor, find an experienced mentor who can coach you on the first three to five houses

R. MICHAEL WRENN Publisher

Community Investor mar/apr 2014

you buy. They’ll help you avoid the career-ending mistakes that can kill your dreams. Trust me on this one: You really can’t do it alone today. Build a team of people who are not only good at their jobs, but who have shown they sincerely care about your well-being. Once you’ve got a team you can trust, nurture those relationships. I hope that you, after reading this edition of Community Investor, will be able to tell that we care about you and that we’re invested in your success. My experiences have proven that, if someone really cares about what they’re doing, just about anything is possible.

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INDICATIVE TRANSACTIONS

$18,500,000

$28,000,000

$32,000,000

$10,500,000

340 properties located in FL, GA

515 properties located in AZ, FL, GA

450 properties located in FL, IN, MD, MN, NC, TX

90 properties located in AZ

$9,750,000

$9,000,000

$5,000,000

$1,734,000

85 properties located in CA

157 properties located in SC, NC, GA, TN

144 properties located in GA, IN, MI

48 properties located in TX, OH, GA

$1,659,000

$2,900,000

$23,300,000

$6,785,000

41 properties located in TX, OH, GA

40 properties located in GA, OH, TX

215 properties located in CA

254 properties located in IN

NEWS BRIEFS

MORE AMERICANS SPEND MORE ON RENT Rent takes up a greater share of the average American’s paycheck compared to a decade ago, a new study shows. About 50 percent of U.S. renters spend more than 30 percent of their income on rent, according to a new report from Harvard’s Joint Center for Housing Studies. That’s an increase of about 12 percentage points compared to 10 years earlier. Nearly 27 percent of renters spend more than half of their income on rent. Ten years ago, 19 percent of renters were in that situation. Adjusting for inflation, real median rents grew by 6 percent between 2002 and 2012, while renters’ income declined by approximately 13 percent.

Stop Paying

LEAD PAINT RULING WORRIES CA OWNERS A court case involving lead paint could have major consequences for real estate values in California, according to a group of property owners and real estate professionals. Three large companies—ConAgra Grocery Products, NL Industries and Sherwin-Williams— have been ordered to pay $1.15 billion to remediate lead paint that was used inside homes built before 1978, the year the United States banned lead pigments in paint. About $700 million of the $1.15 billion will go to repairs on those homes, and

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the remaining $400 million will pay for inspectors to seek out lead paint in other homes from that era. Some owners worry their properties could be blackballed by lenders, insurers and title companies because of the “public nuisance” stigma.

IS MOMENTUM SHIFTING TO APARTMENTS? The next few years will be good ones for the residential construction industry, but the long-term trends aren’t in its favor, according to a recent report. Singlefamily homes, in particular, are going to be in less demand as more customers choose to live in apartments and duplexes, said senior economist Jordan Rappaport of the Federal Reserve Bank of Kansas City. Construction will do well until about 2020 and then enter a period of decline. “It will put downward pressure on single-family relative to multifamily house prices,” Rappaport wrote.

NH LAW TACKLES BED BUG PROBLEM Bed bugs are the focus of a law that recently took effect in New Hampshire. Under the new rules, landlords have seven days to start remediation after a tenant reports a bed bug infestation. The property owner can seek repayment from the tenant if only that unit has bed bugs and there haven’t been any earlier bed bug reports in that unit or adjacent apartments.

EPA, FREDDIE MAC TO FOCUS ON ENERGY EFFICIENCY Freddie Mac and the U.S. Environmental Protection Agency are going to be looking for ways to improve energy efficiency in multifamily housing. The partnership is still in the very early stages, but it could lead to Freddie Mac asking for energy and water performance data during loan underwriting and asset management. The goal is to ultimately persuade borrowers and lenders to make energy-efficiency improvements in multifamily housing.

FORECLOSURE FILINGS DECLINED AGAIN IN 2013 More than 1.36 million U.S. properties—about 1.04 percent of all housing units—were involved in foreclosure filings last year. That represents a 26 percent drop compared to 2012 and a 53 percent decline against 2010, RealtyTrac reported. Florida, Nevada and Illinois had the highest foreclosure rates in 2013. Miami was the metro area with the highest foreclosure rate.

OREGON INTRODUCES NEW SCREENING GUIDELINE According to a new state law in Oregon, landlords there can still screen for certain crimes during the application process, but they can’t reject a prospective tenant based on a dismissed charge or an arrest that did not actually lead to a conviction.

HOME REMODELING PREDICTED TO RISE The United States should see double-digit growth in home remodeling spending during the first half of the year, according to the the Joint Center for Housing Studies at Harvard University. Things should start to moderate by the third quarter as borrowing costs start to increase again. “As owners gain more confidence in the housing market, they are likely to undertake home improvements that they have deferred,” said Eric S. Belsky, managing director of the Joint Center.

MORE SIGNS OF PRICE IMPROVEMENT Housing prices recovered in most markets last year, with 42 markets seeing double-digit median price growth compared to a year earlier, the National Association of REALTORS reported. Of the 142 markets tracked by Realtor.com, only 14 showed annualized price declines in 2013. A select few had exceptional years: Places like Stockton and Lodi in California recorded price gains of 47.3 percent.

The Attorney for Real Estate Investors, Property Management Companies and Private Lenders Condominium Conversions • Clearing Title Asset Protection Strategies • Entity Formations Joint Venture Agreements • Leases Investor Financing and Investor Agreements Representing Your Best Interests – Not Ours.

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MOVERS & SHAKERS

INVESTOR TIP

REALTY MOGUL HITS $10 MILLION MILESTONE Realty Mogul, a crowdfunding site for real estate investors, has passed more than $10 million in transactions. The site allows individual investors to join together to buy shopping centers, self-storage complexes and other properties that might be beyond their reach. So far, the company has returned $1 million to early investors.

PARK AVENUE PROPERTIES EXPANDS THROUGH PURCHASE Park Avenue Properties has bought the residential property management assets of Charlotte’s Barnett Real Estate, adding 212 properties to Park Avenue’s portfolio. Sam Barnett, president of Barnett Real Estate, will join Park Avenue Properties as director of operations, and his team will become part of Park Avenue Properties.

GLINK JOINS REALTYJOIN Ilyce Glink is the new chief content strategist at RealtyJoin, a social networking site for the real estate industry in the United States and Canada.

NREIG ACQUIRES CORE INSURANCE The National Real Estate Insurance Group has acquired CORE Insurance Group of Ohio. As part of the deal, more than 1,700 accounts will be merged into Affinity Group Management’s national platform. 10

Community Investor mar/apr 2014

PREIMA TO OFFER ENTREPRENEURISM TRAINING The Professional Real Estate Investors and Managers Alliance has found a new way to help its members up their entrepreneurial game. PREIMA is teaming with Kauffman FastTrac®, a leading provider of training for aspiring and established business owners. As a FastTrac® partner, PREIMA will offer a 10-week online course that teaches property investors and managers how to find and maximize opportunities for growth. Tuition costs $950 and includes all books, materials and lifetime access to online education resources. The inaugural course will debut this month. It’s already closed, but more sessions are coming soon. If you’re interested in being added to the wait list or receiving more information about upcoming sessions, inquire at info@preimaonline.com.

LANDLORDOLOGY, COZY JOIN FORCES Landlordology.com, a Washington, D.C.based company that provides advice and information to DIY landlords and property managers, is being acquired by Cozy, a website that lets property owners take lease applications and rent payments online. As part of the acquisition, Landlordology will launch more educational resources for renters. Cozy is backed by some of the biggest names in tech investing, including General Catalyst Partners, |The Social+Capital Partnership and Google Ventures.

MAJOR MILESTONE FOR BIGGERPOCKETS The BiggerPockets podcast for real estate investors hit more than 1 million downloads in January. The show, which averages more than 18,500 listens per epi-

sode, is ranked in the top 25 of all business-related podcasts on iTunes, and is among the top 10 for investing podcasts.

INTRODUCING ONPOINT Robin Aldridge and Mike Driscoll are the founders and managing partners of OnPoint Services. OnPoint provides consulting services on fund creation, administration and asset management to the real estate and private lending industries.

PREIMA HIRES MILLER, SCHMITT Two new employees have joined the Professional Real Estate Investors and Managers Alliance. Twilla Miller is the

new membership and program manager. John Schmitt has been hired as the strategic relationship account manager. Have you just closed a great deal? Did you win an award, or do you have some other piece of good news? Share it with Community Investor's readers. Email your story to editor@communityinvestormedia.com.

AT A GLANCE

THE FIX

DATEBOOK

As the warm temperatures return, all sorts of wild animals will emerge from hibernation, including copper thieves. They’re going to be targeting your properties’ HVAC units, so you need to take precautions now. Adding lights and a security camera is a good idea. So is installing a steel security cage around the unit.

35% of U.S. households are renters

33% of renters live in single-family homes

FIELD NOTES

’14 Conferences Meetings to make you sharper March 15 Ignite Expo, Birmingham, Ala. www.igniteexpo.com

April 29-30 AAPL/PREIMA “Got Money? Need Money?” Conference, Kansas City, Mo. www.AAPL-PREIMA.com

The five states with the biggest foreclosure inventory as a share of mortgaged homes, according to CoreLogic’s National Foreclosure Report.

Florida :: 6.7%

New Jersey :: 6.5 %

New York :: 4.9%

Connecticut :: 3.6%

Maine :: 3.6%

May 16-18 REI Expo, Washington, D.C. www.reiexpo.com

July 25-27 REI Expo, Chicago. www.reiexpo.com.

Submit your conference or meeting for possible inclusion in next issue’s Datebook. Send details to editor@ communityinvestormedia.com.

FAMOUS LOST WORDS

“ Nobody talks of entrepreneurship as survival, but that's exactly what it is and what nurtures creative thinking.”

–Anita Roddick www.communityinvestor.com

INVESTMENT STRATEGY

BUYING CLOSE TO THE BOTTOM ALLOWS FOR GOOD RETURNS EVEN IF THERE ARE WAVES OF FLUCTUATING VALUE AT THE TOP END.

Community Investor mar/apr 2014

Don’t Fight the Wave HOW TO PROSPER IN THE COMING REAL ESTATE MARKET ADJUSTMENT. by Eddie Speed and Kevin Shortle

hat does 2014 look like for the real estate investment industry?

Short sales will continue to decline. So will REOs. Foreclosure sales might increase, although it’s more likely that they will simply stabilize. The biggest reason that we are seeing these trends is because property values have been driven up by speculative demand. This speculative demand is spearheaded by hedge funds, private equity firms and REITs. These firms are driving the prices up by overpaying at foreclosure sales. If you have been to a foreclosure sale, you have seen this happen with your own eyes. Banks quickly caught on to this short-term dynamic and decided to start liquidating some of their inventory at the highest prices in years. In eight months, banks cut their short sale activity in half, and why not? They were getting way more at the auction than they would have received in a short sale. REO sales dropped from 20 percent of sales to 15 percent in the same time period as banks directed more properties to foreclosure auctions. PUSHING THE INDIVIDUAL OUT In some areas, the big guys’ overpaying at these auctions has pushed the individ-

ual real estate investor out of the market. In other areas, it has forced individual investors to take smaller and smaller profits. Again, if you have been an active investor, you have seen this happen. As a result, you may be thinking, “Why would these firms overpay for these properties? They will never get their money back, right?” Well, the reality is that these firms never intended to be long-term landlord investors. Their goal was simply to purchase assets, rent them and then sell the rental income stream to other investors. This has just started. Blackstone and American Homes 4 Rent both announced that they will start selling these securitized pools very soon. You can and should fully expect other big firms to do the same thing and soon. Why? Because these firms know this will be a short-lived trend and need to jump on the bandwagon before these investment pools get a bad reputation—which they will!—and property values drop once again. HOW TO THRIVE DURING THIS MARKET ADJUSTMENT To thrive through this coming market adjustment, you need to buy extremely undervalued assets. The assets we recommend are nonperforming and reperforming notes. You see, buying close to the bottom allows for good returns even if www.communityinvestor.com

INVESTMENT STRATEGY

TO THRIVE THROUGH THIS COMING MARKET ADJUSTMENT, YOU NEED TO BUY EXTREMELY UNDERVALUED ASSETS.

• Nonperforming second mortgages

for as low as 15 cents on the dollar • Reperforming first mortgages for as

low as 65 cents on the dollar • Performing first mortgages for as

there are waves of fluctuating values at the top end. In other words, if you can buy something at 40 cents on the dollar (as to its value), you can handle a 10 percent drop in asset value, without injuring your return. HOW HEDGE FUNDS HAVE HELPED NOTE INVESTORS In today’s market, there are an estimated 10 million nonperforming notes.

Community Investor mar/apr 2014

Hedge funds and other large investment entities buy large pools of these notes from the big banks and private lenders. Most of these companies simply resell these notes in smaller pools or even “one-off ” notes at a slight markup. Other investment firms rework the loans and get them to reperform before they sell them at a markup. In today’s market, you can purchase: • Nonperforming first mortgages for

as low as 30 cents on the dollar

low as 80 cents on the dollar So unlike the foreclosure sale, REO and short sale investments where the large investment firms have muscled out most small investors, the note-buying business has been helped by these large investment companies. Why try to fight them when you can ride the wave with them? Eddie Speed is the founder of NoteSchool and a leading educator on the note industry. Kevin Shortle is the director of research and curriculum for NoteSchool. To learn about attending a NoteSchool presentation near you, visit www.noteschool.com.

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YOU'LL NEVER GET WEALTHY IN AMERICA SOONER RATHER THAN LATER BY WORKING FOR SOMEBODY ELSE.

COVER STORY

JIM WOOD Cincinnati State Cincinnati, OH

Cincinnati State’s Jim Wood has taught a generation of young entrepreneurs how to create wealth. He knows his ideas work because he’s lived them—and they’ve made him a successful property investor and educator.

Living the Lesson

im Wood doesn’t teach real estate investing and other business skills to college students for the paycheck. Rather, Wood teaches for the sheer pleasure of passing

on the pragmatic entrepreneurial knowledge that can

make anyone wealthy, if they’re willing to work for it.

Longtime educator Jim Wood plans to retire this spring.

Wood is program chair for management, marketing and real estate at Cincinnati State Technical and Community College, where he’s designed and implemented rigorous and relevant certificate programs in real estate, entrepreneurship and financial planning. His engaging classroom lectures and insightful slices of real-world advice cover a lot of ground, but they all follow one essential path of economic discovery.

“It’s learning how to play the great game of business,” Wood said. “Because once you learn how to play the great game of business, unforeseen and horrible things can happen to you and your company in life, but you can go back and start another business. And frankly, because you failed and have gained so many lessons from the past, you’ll probably be even more successful faster in business No. 2.”

Story by Brian McTavish • Photography by Matthew Collins www.communityinvestor.com

Or business No. 3 or business No. 4—whatever it takes to turn your passion into profit, Wood said. “You’ll never get wealthy in America sooner rather than later by working for somebody else,” he said. “I literally want to be able to drop my students off somewhere in the country and say, ‘OK, using your sales abilities and your business skills and your marketing skills, how can you get a paycheck coming in as quickly

mentor was soon leaving. “You have teachers who can say all they want in theory, but he’s actually done it.” ‘DON’T HAVE TO WORK ANYMORE’ Wood and his wife, Liz, both Cincinnati natives, live on what he proudly calls his “dream piece of property,” a 128-acre farm with a pond in Rising Sun, Ind., just under an hour’s drive from the Cincinnati State campus. “Once you have enough assets, you don't have to work

up, live in it for awhile, and then over time turn around and sell it and move into another house that needed a lot of work. That’s the pattern of how I picked up the passion. These places were so ugly, but they could be so nice.” When Wood and his family moved back to the greater Cincinnati area in 1990, he began buying rundown houses at estate auctions. He would rehab them on nights and weekends, and then sell at a profit of $8,000 to $12,000, sometimes

I‘M ALWAYS INTERESTED IN IMPROVING. IF SOMEBODY'S GOT A BETTER IDEA, SHOW ME. as possible without depending on somebody else?’ “I want these kids to be job optional somewhere between age 40 and 50. I want them to wake up one morning and go, ‘Done!’” After 20 years as an innovative teacher and leader at Cincinnati State—shepherding the ambitions of countless young people in search of self-reliant financial freedom and early retirement—the 63-year-old Wood plans to retire at the end of the current spring semester. “It will be a pretty big loss,” said Cincinnati State student Casey Johnson, 23, who this semester specifically enrolled in Wood’s real estate investing and property management classes when he learned his 18

Community Investor mar/apr 2014

anymore. I don’t have to have a job anymore,” he said. “But I’m also Midwestern and frugal. I drive ordinary American cars. In my life, I’ve also owned beachfront condos in Florida. I’ve owned airplanes. But it’s one of those things where it’s almost like ‘been there, done that.’ At this stage of my life, showiness is not what I’m into.” Wood got to the secure place he is today by accumulating assets and starting to invest in real estate in the 1980s, while he was raising a family and teaching such subjects as applied math and biology at Harbor Springs Public Schools in northern Michigan. “Back in those days,” Wood said, “Liz and I would buy a house that was in terrible condition, move into it, fix it

even $15,000. He thought that he was making good money, until he met an older fellow with more experience in the game. “He said, ‘You should be making $25,000, potentially $30,000 per house,’” Wood recalled. “He said, ‘Here’s your big problem: You’re depending on realtors to tell you what houses are worth, and you’re paying too much for your houses.’ Realtors want to sell the houses for as much money as they can, and I didn’t know that my job was to get the house for as cheap as possible.” In addition, Wood learned that he was wasting time and money in turning the properties around. “I’d be sitting on a house, doing my own work for

six months, and then it would take some time to sell it. And so I had all these holding costs— mortgage payments and taxes and insurance.” Enlightened, Wood started attending real estate investors association meetings in Cincinnati and getting more training, “and things started turning around and getting better,” he said. “I’m always interested in improving. If somebody’s got a better idea, show me.” SAGE ADVICE Times change, and today Wood is the one offering sage advice on how to start small and grow large in real estate investing, which he still believes is the best way to make money.

“It allows you to leverage,” he said. “When you can buy a house and only put down 20 percent, and the bank puts up 80 percent, you get to keep 100 percent of the profits. “I want my students to say: ‘The only way to get wealthy in America is to own businesses and grow businesses.’ And real estate’s just another type of business. It’s a different product, but it’s still a business.” Wood looks at the markets and changes his strategy of real estate investing and what he teaches students, based on what’s working at the time with as little risk as possible. What’s the most effective way to make money from real estate in 2014?

“Here’s what I tell my students: I want you to take and control properties, but I don’t want you to own them. I want you to go out and get houses under contract, typically under lease-option agreements and, if you can, for the entire duration of the mortgage that’s left.” For example, Wood said, a house that sold for $230,000 in 2005 may be worth only $180,000 today, as a result of the economic downturn. That house can be bought under a lease-option agreement and then sold to a couple who got burned from the downturn, and have since recovered financially, but whose bad credit history prevents them

from obtaining a loan to purchase a home. “I like to take those people and sell them the house that I’ve got under a lease-option agreement,” Wood said. “They make the mortgage payments, and at some point in the future, that house is going to appraise again for $230,000—we just don’t know when. But I’m confident that sometime between now and 24 years from now, that house will appraise for $230,000 again. When that happens, they’ll be all set with a normal, conventional loan. “So I’m kind of helping people who are underwater and people who have crummy credit and can’t get into a house again. That’s what I do now.”

‘I WANT YOU GUYS TO BE RICH’ Wood’s way may not be everyone’s way, so he sees it as his duty to inform students about every viable option to create wealth through real estate. “I’m teaching students how to wholesale, how to buy houses and fix them up and sell them,” he said. “I’m teaching students how to buy houses using option agreements and lease options. I’m teaching students how to buy smaller commercial properties.” Yet with 80 percent of students at Cincinnati State receiving financial aid, the most frequently asked question Wood hears is: “Where do I get the money to start investing in real estate?” In response, he talks about how to use private lenders and hard money lenders. But the teacher also never fails to tell his students that nothing beats socking away a little cash every day. “You have to save,” Wood said. “I tell them, ‘I want you guys to be rich.’ As far as I’m concerned, no matter what your background is, you’ve got three choices in life: You can choose to be rich, poor or middle class. But you cannot get rich if you cannot save money—it’s impossible. “It’s about the habit of saving money, not how much you save. If it’s nickels, that’s OK. At the end of each day, there are three jars—savings, investing and tithing—nickel, nickel, nickel. When that’s easy and affordable, then it’s dime, www.communityinvestor.com

dime, dime. When that’s easy and affordable, it’s quarter, quarter, quarter.” ‘HE’S ALWAYS BEEN A MENTOR TO ME’ It’s that kind of commonsense information that Wood prides himself on sharing, not only with his college students, but also with middle and high school students who attend his lectures as part of the annual Youth Entrepreneurship Academy, sponsored by the Ohio Real Estate Investors Association Conference. At the Academy, Wood stresses six streams of income with real estate at the top of the list, followed by starting a small business, creating an Internet

Community Investor mar/apr 2014

business, information marketing, network marketing and stock market/options trading. “The younger kids, they just wonder if this is something that they can really do,” Wood said. “It’s like, ‘I’m too young, what adult would pay attention to me?’ “In a lot of cases, I’ll teach them to call realtors on the phone. And the bottom line is that it’s very difficult for a realtor to tell if he’s talking to a 16- or 17-year-old or a 28-year-old—as long as it’s not face to face.” Parents still have to play a major role in any deals, though, because until someone is 18 years old, they can’t legally contract and buy a house.

“It has to be in an adult’s name,” Wood said. “But if they’ve already got a Roth IRA that their parents have set up for them, they can potentially buy the real estate within that Roth IRA. “Particularly, if they’re just taking $100 out of their Roth IRA to put a property under an option agreement, and let’s say they sell that property and they profit $15,000 from that property, that entire $15,000 amount can go back into their Roth IRA.” When 14-year-old Quentin Gould attended the Academy, his ears perked up when Wood spoke. “He’s a good lecturer,” said Quentin, who has already

begun to invest in real estate. “You don’t want to go buy a house and just break even every time, because you won’t get anywhere. That’s one of the main things I remember.” Quentin, whose business card at the time read “Quentin’s Real Estate Investments,” definitely tapped into Wood’s can-do message. “A friend asked me when I thought I’d make my first million,” Quentin said. “I said, ‘Probably in my twenties.’ And she was going, ‘I bet you could do it by the time you’re 16.’ And so I’m trying to get there by 18.”

continued to page 48 >

Brian McTavish is a senior writer for Community Investor magazine.

FINANCE

Collateral Damage A NEW WRINKLE IN DODD-FRANK COULD LEAD TO SEVERE PROBLEMS FOR BORROWERS IN CRISIS. by James Hart

hile the Dodd-Frank Act creates major headaches for private lenders, it’s important to remember that borrowers can suffer even worse consequences, say attorney David Ambrose, an expert on real estate finance, and Robert W. Cox, founder of Pacific Capital Solutions. For example, under rules that took effect recently, borrowers can no longer roll points and origination fees into their high-cost mortgages, a common transaction among private lenders. For a $150,000 property, that could easily translate to $4,500 to $6,000 that needs to be produced before a loan can go through. That’s usually not a huge burden for homebuyers—in most cases, they’ve probably saved up money for a down payment. But what if you’re Joe? MEET JOE Joe is disabled, survives on a fixed income and doesn’t have much of a credit record because he always pays cash. He lived with his mother in a home valued

at $100,000, and when she died, he inherited the property. There’s an outstanding loan against it, but Joe’s mom never missed a payment. Unfortunately, after Joe’s mother died, the credit union called the loan. He can’t get out of that jam by refinancing because he doesn’t have any savings to pay the $3,000 in fees and charges. There’s a chance that Joe could lose his home. And that’s just one example. It doesn’t matter what problem a borrower faces— back taxes, medical emergency, whatever. Dodd-Frank doesn’t include any hardship provision for people in this situation, Cox said. AN EXTRA LEVEL OF COMPLEXITY Surely, there’s got to be some kind of a work-around, right? It’s true: Joe could seek a smaller loan for $3,000 from a friend, a relative or a different lender, Cox said. He could then tack an extra $3,000 onto his larger loan. Once that goes through, he could take money out and pay off the short-term loan. But it would have to be from a different lender. Under the new Dodd-Frank rules, a lender simply can’t be involved in the financing of those fees, either directly

or indirectly, Ambrose said. Joe’s lender couldn’t even direct him to another lender without violating the regulations. “It does nothing, ultimately, to prevent the financing of these fees and costs,” Ambrose said. “It just adds an element of complexity to the whole process.” If you’re shaking your head, so are a lot of lenders. Many of them are walking away from refinancing high-cost mortgages entirely. “Most of the brokers and the institutional private lenders are just pulling out of that market all together,” Cox said. “It’s become too complicated for them.” ‘YOU’D BETTER WATCH OUT’ And that just creates more pain for people like Joe. “If you are following the articles about the marketplace at all, you will see that there are a number of writers who believe that these new rules are going to make it much more difficult for homeowners to get loans,” Ambrose said. “These new rules are going to make it more difficult for private money lenders to step into that void.” If lenders do continue with refinances on high-cost mortgages, they must be aware of how these new rules will work. “The regulators have already tried to anticipate work-arounds,” Ambrose said. “I’m telling you as a lender: you’d better watch out.” David Ambrose can be reached at drambrose@ ambroselaw.com. Contact Robert W. Cox at r.cox@pac-capital.com.

IT DOESN'T MATTER WHAT PROBLEM A BORROWER FACES—BACK TAXES, MEDICAL EMERGENCY, WHATEVER. DODD-FRANK DOESN'T INCLUDE ANY HARDSHIP PROVISION FOR PEOPLE IN THIS SITUATION.

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SPECIAL FOCUS

THE NEXT

BIG THING RESIDENTIAL REAL ESTATE INVESTORS ON THE HUNT FOR GREAT PROPERTIES SHOULD FOLLOW AN ONGOING, SYSTEMATIC APPROACH. by Julius A. Karash

Community Investor mar/apr 2014

Brewer recommends that investors market themselves fter years of turmoil and uncertainty, a stabilized by getting noticed on social media investor forums such residential real estate market is opening the as BiggerPockets. And the way to do that is with frequent, door to “the next big thing”—a landscape of insightful postings. great investment opportunities. “They need to become fairly active,” he said. “They can’t It has become easier to discern the true value of properties, just put a page up on social media sites and expect business much to the benefit of investors. However, no one should to come if they’re not actively involved.” conclude that residential real estate investing is a quick, Oberon said investors need to market their brand. “Go easy way to accumulate wealth. Experts say the greatest sucout there through social media. We’re currently expanding cess will be attained by investors who adhere to an ongoing, our social media. We’re going to have over 50 different social systematic approach built on effective strategies. media profiles. That allows you to leverage off of each other’s “If you don’t follow a systematic approach, you’re going networks and circles so when you do to run out of money,” said Ivan have a property, or you have a deal, Oberon, co-founder of Coast 2 you can blast those properties and Coast Real Estate Investment IT’S ABOUT WHO deals out to a huge network of people.” Association. “You’re going to run YOU KNOW. WE The right kind of information out of leads. It’s about creating RELY HEAVILY ON enables investors to fine-tune their multiple streams of income.” marketing efforts. Duncan Wierman, OUR NETWORKS. Dan Brewer, principal of Bridge president of the Wierman Group of Capital Management, agreed. real estate investing and consulting Ivan Oberon, co-founder of Coast 2 “If you don’t have an ongoing, companies, has developed software Coast Real Estate Investment Association systematic approach, you’re going that notifies investors about “social to miss opportunities,” Brewer said. triggers” such as people getting new jobs, moving to a new “If I call a banker with bank-owned properties up today and next week and the following week and the following week, he town or getting divorced. People in these kinds of “trigger” knows I’m serious. If I call him one time and never again, he situations frequently are interested in selling a house. writes me off his list.” “Say if today I wanted to find all the motivated sellers in Methods vary, based on an investor’s goals and business my town,” Wierman said, “I would type in the word ‘motivatmodel. But experts say great properties await those who foled’ regarding houses, and everyone who had said that they low these strategies: are motivated to sell a house, it would pull those back into one convenient location. So I can scan them very quickly and MARKETING While marketing typically is a strategy associated with sell- check off the ones I want to send to. We have an automated email system that sends out the template: ‘My name is Duning, it is essential for investors to market themselves as well. can, I’d like to help you … would you consider selling your “You absolutely do need to market yourself,” Brewer said. “You have to create awareness.” house for X?’” www.communityinvestor.com

YOU ABSOLUTELY DO NEED TO MARKET YOURSELF. YOU HAVE TO CREATE AWARENESS. Dan Brewer, principal of Bridge Capital Management

Another good way to market yourself is to be willing to take on complicated transactions (such as the sale of property burdened by liens), do them well and treat all parties in an honest, ethical manner, Brewer said. “You should look to do complicated deals, because you’re going to learn much more on a complicated deal than you ever will on a bunch of simple deals,” Brewer said. “And everybody will come to you. But they’re not going to come to you because you can do complicated deals. They’re going to come to you for two reasons:

one, you’re honest and ethical and you do things the right way, and secondly, you follow through and you get them done.” REAL ESTATE INVESTMENT ASSOCIATIONS Industry experts say investors can gain important knowledge and contacts by joining and becoming active in a real estate investment association (REIA). “Any beginner, before they start, must join their local real estate investor association,” Wierman said. “When people are surrounded by people of like mind

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who are successful, it will inspire and educate them.” And participating in a REIA helps investors make valuable contacts, Wierman said. “It’s not really what you know, it’s who you know in this world.” Even with all the social media platforms out there, investors still need the face-toface interaction offered by REIAs, Wierman said. “You still need to get in front of people, and to get out once a month and talk to other investors and see what’s going on.” For example, Wierman said, attending a REIA meeting can help an investor learn “about a lot of legislation the REIAs are aware of that you need to speak up against.” He said examples of such legislation include laws that favor tenants over landlords, and proposals to eliminate or severely limit mortgage deductions and 1031 exchanges, in which the exchange of certain kinds of property may defer the recognition of capital gains or losses due upon sale. Brewer recalled attending a recent investment club meeting in Chicago. The moderator got buyers, sellers, financiers and wholesalers to identify themselves, in order to bring prospective deal partners together. “Networking through a good moderator can create opportunities,” he said. DIGGING INTO PUBLIC RECORDS “Public records are fantastic for some lead sources,” Wierman said. “Some of my best leads come from researching public records. Probate is No. 1.” Wierman noted that heirs to an estate typically want to sell the house of the deceased person within a certain amount of time, in order to get their money out of the house. “Out in Los Angeles, we found a property that was a probate house and a fire-dam-

aged house,” Wierman said. “It was worth $350,000 once it was repaired. There was only $60,000 left on the mortgage. The owner didn’t want to deal with the fire damage. He just wanted to get it off his plate and make some money, so he took $70,000 for the house. That was an easy flip to another wholesaler out there.” Oberon said the type of records you research depends on your investment strategy. “Court records won’t necessarily do you any good, unless you’re focusing, say, on sourcing leads from probate attorneys and probate listings and those sorts of things,” he said. “In that particular strategy, you would go access court records once a week, when the records are released that show which properties are probate, so you can email and mail letters to the trustees and the beneficiaries of those probate properties.”

ties or certain areas or certain positions where they could help identify opportunities for me.” “Finders” can include a postman who notices that a house is vacant, or someone with a utility company who knows when a house has had its utilities turned off, Brewer said. “There are a number of those relationships and associations that people rely on,” he said. “You want to identify those people who will do the digging, talk to people in the neighborhood, talk to probate attorneys, and they just want a finder fee, $1,000 or $2,000. But when they come to you, you want to make sure you can follow through and pay them, and then they’ll go find you another deal.”

Networking goes hand-in-hand with collaboration, which Brewer characterizes as “the next big thing” in real estate investing. “Five years ago, 10 years ago, you did all your own stuff, figured it out yourself,” Brewer said. “You went to the courthouse, you went to the banks, whatever. Now it’s a community out there. Social media, the Internet, everything out there has created the perfect environment for collaboration. No longer should you try to figure it all out yourself. You want to become part of the fabric, and by being part of the fabric, those opportunities will come to you.” Julius A. Karash is a freelance writer and editor in Kansas City, Mo. (913) 208-3640 ::julius.karash@gmail.com :: www.juliuskarash.com

NETWORKING For a real estate investor, almost every strategy includes one or more elements of networking. Indeed, effective networking is looked upon as a key component of any successful investment operation. “It’s all about people, it’s all about relationships,” Oberon said. “It’s about who you know. We rely heavily on our networks. If we have a specific area that we want to go into, then we will reach out to people we know in that particular market, and compare notes. We’ll say, ‘We’re looking to do this and this in this area, how does this area look? Do you know somebody who can manage projects there? Do you know any trustworthy contractors? Good realtors?’ Because online tools will only get you so far. You have to have the right relationships in your business in order to be successful.” Brewer recalled when he created a network of people he referred to as “finders,” or “people who were in certain communiwww.communityinvestor.com

DEAL

Selling the Seller HOW CAN YOU CONVINCE SELLERS TO OFFER OWNER FINANCING? by Mark Nagy

inding investment capital is one of the most challenging parts of the real estate business. That’s why seller-financed deals are so sweet. As the buyer, you can save a considerable amount of time, cost and frustration if the owners agree to offer and hold financing. Further, there are many advantages for the sellers if they choose to hold financing. The property will typically sell faster, at a higher price and with an abovemarket interest rate. Sellers also possess the power to negotiate payments, interest rates, principal payments and payoff according to their cash-flow needs. Plus, they’ve got personal knowledge of the collateral involved. Seller financing can be a very logical way to put together a deal. But logic isn’t the only variable you have to consider, especially if the owners aren’t experienced in real estate. You absolutely must respect the sellers’ emotions. THE BIG IDEA BEHIND SMALL TALK Before you begin negotiating over a property, it is important to get to know the sellers, their situation and their needs. This can look a lot like small talk, but can provide crucial information. Ask why they want to sell and what they’re hoping to get out of the deal.

What do they do for a living? How long have they been in the home? Are they retiring? You are asking questions that fit the situation to draw out information. Once you are familiar with their situation and financial needs, restate what your understanding is so that you are all on the same page. This way, the sellers know they have been heard and understood and can clarify any point you may have misunderstood. At no point in this discussion should you mention seller financing—or engage in any other kind of negotiation. Too many investors go directly to deal mode, which can spook unsophisticated sellers and put them in defense mode. If sellers are emotionally engaged, there is a much greater chance they will entertain a conversation on owner financing. When sellers are not emotionally enrolled, nothing you say, no matter how logical, is going to pierce that barrier. Remember: For many homeowners, their house is their single biggest asset— and that’s not counting the years and memories tied up in their ownership. It can be an incredibly sensitive subject for them, both financially and personally. Also, give the sellers information about you and your plans for the property, to increase their comfort level with you and your situation. For example, you might let the sellers know about your plans to

WHEN SELLERS ARE NOT EMOTIONALLY ENROLLED, NOTHING YOU SAY, NO MATTER HOW LOGICAL, IS GOING TO PIERCE THAT BARRIER. 28

Community Investor mar/apr 2014

improve the property. Not only does that help you as the purchaser, it also benefits them because their collateral (the house) will increase in value. You can also use this as a rationale for a lower down payment or terms that are more beneficial to you. OVERCOMING OBJECTIONS Once you understand your sellers’ situation, you’ll be in a better position to develop a deal that works for their unique set of circumstances, which is

key to increasing their level of comfort with seller financing. If a relationship foundation has been developed, they will be more open to resolving the issues and helping you in your financing needs. As potential problems arise, continue to ask questions to gain a better understanding of their concerns. Once the issues are defined, you can suggest the solutions. Some sellers might feel uncomfortable being responsible for collecting payments and servicing the note, or they might dislike the idea of dealing with all the IRS-related paperwork. One solution is to recommend a third-party servicer that can handle all of those details.

It is important to distinguish the difference between selling the deal and building the deal around the sellers’ situation and needs. Paying attention to sellers’ emotions can create terrific long-term benefits. I have been in several situations where I’ve paid off a seller-financed property, and the sellers will ask if they could reinvest their money with me on other projects. More often than not, they’ll send their friends and family to me, too.

Mark Nagy is the principal at Metro Street Capital and has nearly three decades of experience in the world of real estate investment. :: mnagy@metrostreetcapital.com

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LAW

The Real Impact of the JOBS Act IT COVERS SO MUCH MORE THAN CROWDFUNDING.

by Jillian Sidoti

f you’ve read about the Jumpstart Our Business Startups Act of 2012, you’re probably aware that it makes it possible for entrepreneurs to sell equity in their ventures via online crowdfunding portals. While that feature has attracted the most attention, the JOBS Act is about much more than crowdfunding. The legislation impacts three other areas of securities law that should interest real estate investors. Here are some advantages and disadvantages to these four pieces. TITLE I: HELPING THE LITTLE GUY GO PUBLIC Title I creates a new “emerging growth companies” class of public companies

Community Investor mar/apr 2014

that earn less than $1 billion in annual revenue. Under Title I, these companies qualify for a series of exemptions that are designed to help them more easily and confidentially file for an initial public offering, without fear of not fully complying with certain SEC rules or sections of Dodd-Frank. Those exemptions include: • Confidential SEC staff review of draft

IPO registration statements. • Scaled disclosure requirements. • No restrictions on test-the-waters

communications with qualified institutional buyers (QIBS) and institutional accredited investors before and after filing a registration statement.

• Fewer restrictions on research around

the time of an offering, including research by participating underwriters. (This is a summary of Title I’s effects. For more specific information, visit the SEC’s website.) It hasn’t always made sense for a small fund or issuer to go public because they often lack the operating history and the financial resources for the required audits, legal work and ongoing compliance. However, many smaller issuers have found that going public opens the doors to a larger capital market. James River Holdings Corporation (OTCQB: JRIV), a small asset holding company, initially specialized in single family residence investing in the Ozarks of Missouri. The founder and CEO, Barry Watts, discovered that he was running out of funding sources for deals and was interested in expanding outside of just single family investing. On Feb. 1, 2012, the company’s initial public offering was declared effective by the SEC. Since going public, JRIV has been exposed to a variety of hedge funds, investment bankers and other “funders” in the stock market space at a variety of events such as the National Investment Banking Association. These presentation opportunities are generally not available to private companies of similar size. Within six months of going public, JRIV was able to enter into an agreement to acquire a multistate paving company, fulfilling Watts’ desire to expand the company’s portfolio and business lines. TITLE II: DESPITE THE HYPE, IT’S NOT FOR EVERYONE Title II creates a new Rule 506(c) under the Securities Exchange Act’s Regula-

FEELING TRAPPED, ISSUERS ARE NOT ABLE TO EFFECTIVELY GROW THEIR BUSINESS BECAUSE THEY CAN’T OBTAIN SUFFICIENT CAPITAL IN THEIR CURRENT CIRCLE OF INVESTORS, AND THEY DON’T KNOW HOW TO FIND NEW INVESTORS WITHOUT ADVERTISING. tion D. That rule, which took effect in September 2013, allows small companies and private investment funds to use “general solicitation” to reach accredited investors, which means they may advertise or publicize an offering on the Internet, radio, television, billboards and other mediums. Offerings under Rule 505 and Rule 506(b) will still continue to be prohibited from using general solicitation to reach investors. This newfound “soliciting” freedom under Rule 506(c) does come with restrictions, though. 506(C) OFFERINGS MAY BE SOLD TO ACCRED-

Generally speaking, an “accredited investor” is defined as an individual who earns $200,000 per year, a married couple that earns $300,000 per year, or an individual or married couple with a net worth of $1 million exclusive of their primary residence. This, for many issuers, may exclude many family members or previous investors who do not meet the income or net worth requirements of accredited investors. ITED INVESTORS ONLY

THOSE ACCREDITED INVESTORS MUST BE VERIFIED AS ACCREDITED Title II also shifts the burden of verification from the investor to the issuer. Issuers can verify an investor’s status in a number of ways.

• Income-based verification: Copies of

any IRS document that shows income (W-2, K-1, 1099, 1040, etc.) for the two most recent years, along with written

verification that investor will reach accredited limits in the current year. • Verification based on net worth: A

copy, within the past three months, of the following: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties; a credit report from at least one of the nationwide consumer reporting agencies; and a written statement that all liabilities necessary to make a determination of net worth have been disclosed. • Third-party verification: Written

confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor. Other persons could potentially serve as third-party verifiers, subject to additional rules. • Roll-over accredited: Those people

who were treated as accredited investors under a prior 506 offering by the same issuer are deemed to be accredited investors in future 506(c) offerings, provided that such investors certify they are accredited investors.

The SEC has also created a portal on its website for uploading of advertising materials by those relying on Rule 506(c). Uploading is entirely voluntary and is kept confidential. The portal may be found at https://www.sec.gov/forms/ rule506c. Anecdotal evidence suggests that Rule 506(c) may not truly benefit the smaller issuer, but rather the big hedge fund or REIT looking to spread its message faster and easier to accredited investors. These are the issuers who can readily place an ad in The New York Times or The Wall Street Journal without fear of cost or consequence. That kind of competition can be difficult for a smaller issuer to overcome. Coupled with the hassle of accredited verification, many issuers have elected to instead stick with a Rule 505 or Rule 506(b) offering and take a more personal approach to attracting investors. TITLE III: GREAT FOR STARTING, NOT FOR GROWING Title III allows issuers to raise up to $1 million within any 12-month period without triggering the registration requirements of the Securities Act of 1933, as long as the transactions are made through an SEC-approved broker or funding portal. It’s great if an issuer just needs small amounts of money from smaller investors, but it’s not that helpful for those who want to expand to bigger profits and deals. No investor may invest more than 10 percent of their net worth or a maximum of $10,000. This leaves a small issuer with the need to convince at least 100 investors to invest in their deal just to raise a mere $1 million. www.communityinvestor.com

TITLE IV: EXPANDING THE FORGOTTEN EXEMPTION A common complaint in the capitalraising world involves the limitations that Regulation D places on advertising and solicitation. Feeling trapped, issuers are not able to effectively grow their business because they can’t obtain sufficient capital in their current circle of investors, and they don’t know how to find new investors without advertising. For some issuers, Regulation A can solve this problem. Currently—and even before the JOBS Act—Regulation A allows an issuer to raise up to $5

million in a 12-month period through the means of general solicitation. There is little to no qualification required of investors, who need not be accredited under Regulation A. Unlike a public “registered” offering, however, Regulation A filings do not have ongoing reporting requirements or require financial audits. Under Title IV, the JOBS Act will carve out a new section of Regulation A, referred to as “Reg A+” or “Tier 2.” This will allow the issuer to raise up to $50 million in a 12-month period with few, if any, investor suitability requirements.

Despite its flaws, the JOBS Act truly has been for the betterment of the small issuer. It offers multiple opportunities to jumpstart their fundraising. Everyone— issuers, auditors, attorneys, investment banks, brokers, marketers, investors, regulators—is waiting to see the good, the bad and the ugly as the rules unfold and the capital starts flowing. Jillian Sidoti is an attorney with the firm of Trowbridge Taylor Sidoti in Murrieta, Calif. She specializes in private placement memorandums, Regulation D filings, public offerings and other transactional legal matters. She is also a frequent speaker on how real estate investors can legally raise capital for their investment projects. (323) 799-1342 :: jillian@syndicationlawyers.com

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INSURANCE

Preventing Spring Breakdowns SIX WAYS TO PROTECT YOUR PROPERTIES AND KEEP YOUR CLAIMS LOW. by James Hart

his winter was particularly ugly, but property investors and managers can’t let their guard down just because the sun is shining and the temperature is finally above zero again. There are so many ways that springtime hazards can lead to damage at your investment properties. Community Investor spoke with Rick Abell, vice president of risk management and claims at Affinity Group Management, about the best

will reduce the likelihood that strong springtime storms will chuck a limb through your roof. Not sure if you’ve got any dead limbs? Check for buds, Abell said. Dead branches won’t have any. YARD MAINTENANCE Keeping

the lawn mowed and the shrubs trimmed actually does have an effect on your insurance claims. Tall grass is one of the most obvious visual clues that a property isn’t being occupied—which could lead to trouble with vandals and thieves. If you’re the lucky person piloting the mower, this will give you a chance to

day and seven inches of snow the next. Keep the water turned off, or you could end up with frozen pipes and flooded properties. WHAT’S UP WITH THE SUMP PUMP? Melting

snow and spring rains may increase the chance for water getting into basements. If any of your properties have sump pumps, have them checked and order the necessary preventive maintenance to help guard against flooding. ALERT YOUR INSURER ABOUT VACANCIES

A property being vacant may cause a change in the limits of your coverage, and your insurer needs to be made aware if a structure is unoccupied. Spring is a natural time for tenants to move, so if you don’t have a cash-for-keys program, think about starting one. It’s exactly what it sounds like: You give a tenant a little money after you inspect the property for damage and they physically hand you all the keys to the unit, Abell said. You can do this with all your tenants, but it pays off big time when dealing with evictees. These are people who, in many cases, might have a grudge against you and aren’t above coming back to wreak havoc. Is it galling to give cash to someone who owes you back rent? Absolutely, but if that prevents a $10,000 catastrophe at one of your properties, you’re money ahead.

CASH FOR KEYS

TALL GRASS IS ONE OF THE MOST OBVIOUS VISUAL CLUES THAT A PROPERTY ISN'T BEING OCCUPIED— WHICH COULD LEAD TO TROUBLE WITH VANDALS AND THIEVES. methods for protecting your properties and avoiding trouble with insurance claims. TIME FOR TREES Spring

is a good time to take a look at the trees on your property, Abell said, because for the last few months, they’ve been under high stress from ice and snow. You need to see how they fared during the winter. Trim back healthy branches so they don’t brush against your houses, and remove any limbs that died. Not only will this improve the trees’ health, it also

take a quick visual inspection of your property’s exterior and notice anything else that needs fixing. Many investors remember to turn off the water in their vacant properties during the winter, but this year, there were several who didn’t, especially in places like Georgia and Alabama, which normally don’t have to worry about “polar vortexes.” Either way, don’t get careless during the spring. You might have 60 degrees and sunshine one KEEP THE WATER OFF

James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

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NEW KID ON THE BLOCK

The Tortoise, the Hare and the Tenant WHY ‘LOW AND STEADY’ JUST MIGHT HELP YOU WIN THE RACE TO GREATER PROFITABILITY. by Shane Sauer

esop’s classic fable of the tortoise and the hare isn't just for children. Adults also can profit by applying its lessons to everyday life. For example, as a seasoned investor, lender and educator, I have found this particular fable to ring true even when it comes to finding the best tenant for a rental property. Much like the hare in the story, most investors instinctively hurry to reach their goals. In their haste or overconfidence, they can expose themselves to pitfalls along the investment path that can set them back. The tortoise, meanwhile, exercises traits such as wisdom, patience and persistence to ultimately achieve success. Let’s compare each approach as it applies to one of the key steps in attracting a great tenant.

HARE MENTALITY The monthly rent payment is the primary way you’ll generate revenue from your properties. So it would make all the sense in the world to seek the highest possible contract rent amount if you're trying to maximize profitability. This is the hare mentality. And while it has a certain amount of logic, there are potential pitfalls to a top-line revenue focus. • Seeking top-of-market rents can

extend marketing periods, prolonging your turnover period—the time between your occupancies. Extended marketing periods can require additional marketing expenses, and lengthy vacancies leave properties exposed to a higher risk of theft and vandalism. • Depending on your properties’ loca-

tion and appeal, it might be harder to find qualified tenants who can afford that higher rent. Some owners, feeling pressed to place a tenant in their property, will make exceptions during the screening process. They will accept someone who will be strained to make the monthly rent, and that only increases the odds of a potential payment default.

• Contract rents that are higher than the

market average for comparable units have historically lower tenancy durations due to several reasons, including financial strain on the tenant and a greater likelihood that they’ll move. THINK LIKE THE TORTOISE Now consider the mentality of the tortoise—“slow and steady.” As it relates to your rental payments, perhaps the phrase “low and steady” is appropriate. That may sound counterintuitive, but one of the traits of the tortoise is wisdom. As the saying goes, “Learning from your own mistakes is gaining knowledge. Learning from the mistakes of others is gaining wisdom.” Not a believer? I understand. I didn’t believe it either at first. But you know what I do believe in? Numbers. Let me teach you a quick exercise to guide your decision-making the next time you are marketing your rental property. Get a pencil, paper and a calculator. Fold your paper in half. One side is the hare, the other the tortoise. (You can also do this exercise with a spreadsheet.) On the hare side of the paper, determine your annual cash flow based upon a rent slightly above market rate. On the other side, the tortoise side, determine your annual cash flow based upon a market rate or a slightly below market rate. Now the true story unfolds when you make the following adjustments: • The lower rent side—the tortoise

side—will stay occupied longer, so reduce your vacancy percentage.

NOW CONSIDER THE MENTALITY OF THE TORTOISE— ‘SLOW AND STEADY.’ AS IT RELATES TO YOUR RENTAL PAYMENTS, PERHAPS THE PHRASE ‘LOW AND STEADY’ IS APPROPRIATE. 34

Community Investor mar/apr 2014

• Since the lower

market rents increase tenancy duration, if your property manager charges a “lease up” fee when a new tenant is placed in a property, make sure to reduce this amount based upon an annualized approach. • A unit priced at or below market his-

torically rents quicker, so reduce your vacancy percentage again. • If your property manager charges

for marketing based upon time, reduce your marketing expenses for the tortoise side. • Determine what your average main-

tenance and make-ready costs are for tenant turnovers, and credit the tortoise rent side appropriately because these costs will happen less frequently. • Increasing your credit loss percentage

may be appropriate on the hare’s side. There are other items you can add to this exercise, but by just incorporating the above, you will reveal a rent amount and marketing angle that will result in a maximized bottom line, not just a bloated top-line revenue. Investing in rental property for long-term hold can be a very rewarding investment strategy. Whether you are a new investor or a seasoned veteran needing a reminder, I hope the metaphor used in this article, along with this simple exercise, serves as a reminder that persistence, wise decisions and time will ultimately garner you success.

SHARE YOUR NEWS Have you just completed a major deal? Are you expanding your operations? Maybe you’re hosting a major conference. If you’ve got news, be sure to share it with the readers of Community Investor magazine. Send your information to editor@communityinvestormedia.com for possible inclusion in the next issue or our email newsletter.

Shane Sauer is the co-founder of RentFax, a company that provides census tract-level data and data interpretation tailored for rental property investments. www.rentfaxpro.com www.communityinvestor.com

PROBLEM SOLVERS

A Closer Look at Crooks WHERE IS THE BEST PLACE TO STATION A SECURITY CAMERA? by James Hart

’m installing a security system in a vacant property, but I’ve only got one camera. Where should I put it?

About 60 percent of burglars enter through the front door, so that’s where you should station your camera for maximum effect, according to Kevin Raposo and Cara Giaimo of SimpliSafe

triggered by changes in temperature, so they shouldn’t be placed near vents or direct sunlight. You’ll need to decide if you want to hire a monitoring service, which can require a monthly fee. Many security systems will alert you via text message or email if your cameras or sensors detect something, but you might not be in a position to immediately respond. A

MANY SECURITY SYSTEMS WILL ALERT YOU VIA TEXT MESSAGE OR EMAIL IF YOUR CAMERAS OR SENSORS DETECT SOMETHING, BUT YOU MIGHT NOT BE IN A POSITION TO IMMEDIATELY RESPOND. Home Security Systems, which sells wireless, self-installed security cameras and sensors. Posting the camera outside the front door is usually better, so it can serve as a visual deterrent. Most thieves are going to think twice when they know the property is monitored. If an exterior location isn’t an option, installing the camera in the property’s entryway is a good second choice. Maybe your security system includes more than one camera. The back entrance is a natural place for a camera. And if you’re dealing with a multilevel property, consider installing a camera either upstairs or trained on the stairway, Giaimo said. Today’s security systems often include motion sensors. If you’ve got a room with several windows—another popular point of entry for the bad guys—that can be a good place to put a sensor. Be careful, though. The sensors are often 36

Community Investor mar/apr 2014

monitoring service will call the police for you. Of course, the best security system in the world won’t do a thing if it’s not armed—the single biggest mistake most users make, Raposo said. Or they don’t test the system on a regular basis and make sure it is set up correctly, which can lead to false alarm after false alarm. This is all academic for property owners who possess a grand total of zero cameras. Even then, Giaimo and Raposo say, there are steps one can take. Simply checking the property on a regular basis is a big help. Be careful not to schedule those visits at the same time on the same day of the week. Burglars like to stake out the properties in a neighborhood and will take note. You might not be the only person keeping an eye on your property. For more information, visit www.simplisafe.com.

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PROTECTING YOUR INVESTMENT

A Prohibitively Expensive Mistake HOW TO DESTROY YOUR SELF-DIRECTED IRA WITH A SINGLE GALLON OF PAINT. by Bryan Ellis

his is the very tragic story of how a single gallon of paint could destroy your entire retirement savings. Pay close attention, my friend: This is far more realistic than you’d prefer to believe. Let’s set the stage: You’re a smart investor who keeps the long term in mind. You’ve done all the right things. You’ve set up and funded a self-directed IRA, then used it to buy properties and hired a great management company to handle the day-to-day business of your rentals. You’ve gotten good legal and tax advice along the way, and with your growing portfolio, ever-increasing cash flow and growing equity in your self-directed IRA, there’s nothing but blue skies in your retirement future. But there’s that one gallon of paint that could cost you all of your retirement savings. You remember that gallon of paint, don’t you? It seemed innocent enough. It was the right color, the right quality, the right amount. Unfortunately, that gallon of paint is about to destroy your retirement savings more quickly than the very worst real estate crash. OPENING THE DOOR TO IRA TROUBLE Here’s how it happened: Several years ago, when you first began building your self-directed IRA, you noticed the paint on the front door of your rental property was chipping. Your management company was scheduled to bring by some potential tenants the next day, and you were concerned that the less-than-stellar

Community Investor mar/apr 2014

look of the front door would cast your property in a bad light. So you fixed the problem. You went to the local hardware store, picked up a gallon of paint and quickly repainted the door. It looked like new, and the potential tenants were very impressed. But little did you know, you destroyed your retirement savings as a result of a little-known set of technicalities referred to as “prohibited transactions.” WHAT’S A PROHIBITED TRANSACTION? Prohibited transactions are the bane of the self-directed retirement account owner. A prohibited transaction happens when a person interacts with a self-directed retirement account (or the assets of the account) in a way that’s prohibited by law. For example, when you bought the paint to freshen up your front door, you paid for it with cash out of your pocket with the intention of getting a reimbursement from your self-directed IRA. And that’s where the damage was done. From the vantage point of the IRS, what you did was to loan money to your IRA. It was a small loan, to be sure. But unfortunately, an IRA owner is prohibited from loaning money to his own IRA, and there are zero exceptions to this rule. By paying for the paint with your own cash, you’ve committed a prohibited transaction. If it wasn’t enough that the IRS can sting you for making a loan to your IRA, they can also penalize you for “furnishing services” to your IRA. By painting

the door yourself, you were contributing a service to benefit the assets of your plan. Unfortunately, the IRS specifically prohibits you (as an account owner) from furnishing goods, services or facilities to your plan. But providing a “service” to your own IRA is what you did by repainting the door … and you’ve committed a second prohibited transaction.

WHAT ARE THE RAMIFICATIONS? In a word, severe. If you commit a prohibited transaction with your selfdirected IRA, your IRA will cease to be an IRA as of the first day of the year when the prohibited transaction was committed. You’re in for a firestorm of past-due income taxes along with very severe penalties and interest. How bad can it really get for you? Unfortunately, it’s actually possible to wipe out the entire value of your self-directed IRA as a result of a prohib-

ited transaction committed long ago. That’s because most prohibited transactions aren’t discovered until many years later when a self-directed IRA is being audited by the IRS. In the intervening years, the income taxes, penalties and interest you’ll owe as a result of that prohibited transaction have done nothing but grow, compound and expand. It’s a bad situation. The bottom line: Prohibited transactions are the mortal enemy of selfdirected IRA owners. One prohibited transaction can literally cause you to

lose everything you’ve worked so hard to save and build for your retirement and your heirs. Fortunately, there is a very simple way to substantially minimize the risk of committing a prohibited transaction, and you can learn about it in my article in the next issue. Stay tuned! Bryan Ellis is executive director of the Self-Directed Investor Society, an invitation-only association of high net worth self-directed investors. Bryan is also the publisher of the Bryan Ellis Investing Letter with more than 500,000 subscribers nationwide. You can reach Bryan via the SelfDirected Investor Society at www.sdisociety.org.

www.communityinvestor.com

IN DEPTH

YOU, INC.

3 Moves for Bigger Growth HOW TO BREAK THROUGH THE HABITS AND MENTAL BLOCKS THAT ARE KEEPING YOU FROM YOUR FULL ENTREPRENEURIAL POTENTIAL. by James Hart

aybe you’ve been in the real estate game for a few years now, and your investments are humming along, providing a steady, predictable income. You’ve mastered all of the basic skills that go into being a property investor. You’re doing OK. But if you’re like most established entrepreneurs, you want to do more than just “OK.” You’ve got a desire to make your business as big and profitable as possible. It's a common motivation, and one that Michele Markey sees all the time through

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her work with Kauffman FastTrac®, a leading provider of training for aspiring and established entrepreneurs for more than 20 years. The program has taught more than 350,000 people around the world how to start and grow their own companies. Unfortunately, some business owners never achieve their dreams of high growth—often because they stumble over basic habits and mental blocks. Every entrepreneur’s situation is different, but here are three strategies that could help you break through to new levels of growth, said Markey, who serves as Kauffman FastTrac’s vice president.

WRITE A STRATEGIC PLAN

Most businesses fail to grow because the owners focus too much on day-to-day procedures and never develop a longterm vision. “They need to spend some time thinking strategically and developing a strategic plan,” Markey said. A strategic plan is a document that outlines what you want your business to achieve in the next three to five years. How much revenue will you generate? Will you enter new markets? Offer new services? Creating a plan not only makes you put your goals in writing, it forces you to think about how you’re going to turn

neurs who are in other fields as well, Markey said. “Oftentimes, some of the best advice comes from people who are in a different line of work.” BRING EXTRA HELPERS ON BOARD—AND BE READY TO LEAD THEM

those dreams into reality. Once you know what your major goals are, it’s much easier to break them into a series of actionable steps. The key word is action, though. A strategic plan won’t do any good if nobody puts it to work. JOIN THE ENTREPRENEURIAL COMMUNITY

When you’re in business for yourself, it’s easy to devote practically every waking minute to business. But smart entrepreneurs also make time to be part of the larger entrepreneurial community, Markey said. They do this by participating in civic clubs like Rotary or professional groups for their specific industry. They attend workshops and conferences. They join mastermind groups or mentoring organizations. This involvement is a good idea for a number of reasons. One, because it’s nice

to occasionally talk to other human beings who aren’t customers or employees. And two, you’re apt to meet businesspeople who have overcome the same kinds of problems you are facing now, and the vast majority of them will be more than happy to share their solutions. You might even find a more experienced entrepreneur who will be willing to serve as your mentor. For property investors, joining a local real estate investors association can be a great way to meet likeminded people. But be open to learning from entrepre-

When a venture is just getting off the ground, it’s a given: you will be responsible for doing most, if not all, of the work. As your operations grow, though, you will probably need to hire employees or outsource some tasks. For property investors, that might mean hiring a property manager. A lot of entrepreneurs drag their feet when it comes time to build a team. Sometimes they simply don’t want to spend the money. In many cases, though, they don’t think anyone else could perform the work as fast or as well as they can. “At some point, as a business grows and they see some success, their inclination to do everything ends up stifling the growth of the company,” Markey said. “They become the bottleneck.” Hiring extra help is only part of the process. Entrepreneurs also need to get their policies and procedures into writing. continued to page 48 > James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

CREATING A PLAN NOT ONLY MAKES YOU PUT YOUR GOALS IN WRITING, IT FORCES YOU TO THINK ABOUT HOW YOU'RE GOING TO TURN THOSE DREAMS INTO REALITY. www.communityinvestor.com

IN DEPTH

YOU, INC.

Skipping to the End HOW SUCCESSION PLANNING CAN HELP YOU BUILD A BETTER BUSINESS. by James Hart

n the next seven to 10 years, the United States is likely to see a flood of business sales and mergers as greater numbers of Baby Boomer entrepreneurs age into retirement. The trend could be a huge opportunity—or a huge problem, because many business owners don’t start their succession planning early enough. Most experts recommend allowing at least three to five years before the owner plans to exit. Ed Warren, CPA, CFP, assists clients with succession planning and other needs at RubinBrown LLP, a leading accounting

Community Investor mar/apr 2014

and professional consulting firm. One of the keys to a successful succession, he said, is time. “Don’t wait until the last minute to start this,” Warren said. “It does take time, and it is complicated.” Even if a sale isn’t imminent, there can be substantial benefits to building a venture so that it can ultimately be sold, whether that’s three years or 30 years down the line. In fact, in a new report, Baker Tilly International recommends that entrepreneurs begin thinking about this goal almost as soon as they launch their businesses.

What Really Creates Value in Your Business? Obviously, entrepreneurs want to sell their businesses for the greatest possible amount, but fixating on that is a mistake if they don’t build operations that justify a high price. Look at what creates the value in your business. For real estate investors, that’s obviously their individual properties. But they shouldn’t overlook intangible assets, such as their systems for handling rent payments or onboarding new tenants, their branding and marketing, and their network of employees and service providers. These pieces of the business make it possible to generate revenue on an ongoing basis. By realizing those intangible assets’ importance to the business’s operations, owners might be able to devote more resources and attention to them—

such as documenting processes or trademarking logos and taglines—and thus increase their value to potential buyers. “If you focus on continuity and ongoing jobs, you are in fact drawing your focus to the capital value drivers of your business, which in turn supports sale price should

Or maybe a son really wants to take over from Mom, but he is clearly a bad fit. In those situations, having time—and the help of an outside adviser—can help business owners navigate potentially tricky waters. The outside adviser can serve as a “quarterback” in a number of ways, lead-

DON'T WAIT UNTIL THE LAST MINUTE TO START THIS. IT DOES TAKE TIME, AND IT IS COMPLICATED.

you one day decide to sell,” wrote Richard Shrapnel, the author of Baker Tilly International’s “Future Proofing the Capital Value of Your Business” report. To be clear, money is not a secondary concern. “You certainly want to maximize the value,” Warren said, “but the intangibles can go a long way to making the business succeed into the next generation.”

The Legacy You Leave By taking a long-term approach to succession planning, entrepreneurs also give themselves time to think about their goals, develop an orderly process for getting there and find advisers who can help them along the way. What do they want for themselves, their family and their employees? Do they want to sell to an employee or a third party, or do they want a son or daughter to take command? A longer transition period is an especially good idea if family is involved, Warren said, because there will typically be more issues to address. Let’s say an entrepreneur has four children, but only one of them wants to be involved in the business. If that sibling “inherits” the company, how does that affect the entrepreneur’s estate planning?

ing business owners through the process and pulling in professionals in law, tax planning and other areas as needed. Some entrepreneurs will place their potential successor in a variety of roles in the business, allowing them to work their

way up and learn its operations from the inside out, Warren said. Plus, because the successor has a personal stake in the company, he or she might be more likely to make good, informed recommendations for growing revenue or finding efficiencies. A lot of entrepreneurs put off succession planning because they think it’s all about getting ready to retire, and they simply are not ready to take that step. That’s the wrong way to look at it, according to Shrapnel. “It is about growth, opportunity and building the future while you are there today,” Shrapnel wrote. “It is about the incumbent team taking responsibility for future proofing the capital value of the business by ensuring that the next team is capable, competent, experienced and will be able to take the business to the next level. “Succession is the legacy you leave.”

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IN DEPTH

YOU, INC.

Built to Scale EVERYBODY STARTS SMALL, BUT THE SMARTEST ENTREPRENEURS CREATE VENTURES THAT ARE DESTINED FOR GROWTH. by James Hart

t’s hard to look at the world’s most successful entrepreneurs and not feel a little intimidated. The one thing you must remember is that every business starts small, says George Antone, the investor, author and educator who created MPactWealth, formerly WorthClasses, a company that specializes in training for private lenders and entrepreneurs. The big guys are just small entrepreneurs who built operations that were capable of scaling up, and you can do the same thing, he said. You just have to master three basic concepts: metrics, systems and teams.

Metrics Business is like basketball: You can’t tell if you’re winning unless you keep score. That's why it is essential to keep track of your business’s key performance indicators—the metrics that show how your operation is truly performing, not what it “feels” like. Measure the things that matter. What’s your average acquisition cost for a property? What are your earn-

ings? How many deals do you have in the pipeline over the next 90 days? On average, how long does it take you to sell a property? Even the smallest operation will have at least 10 high-level metrics to follow. For example, Antone recommends that entrepreneurs keep track of their “runway”—how long they can stay in business without turning a profit. If you have $100,000 in the bank, and it costs $50,000 to keep your enterprise running for a month, you've got a runway of two months. That’s the whole point of knowing the numbers. They serve as an early warning sign when things aren't working right, so you can attack those problems. And if the numbers are good, they might indicate the most productive places to invest extra time and money. “Without understanding the numbers,” Antone said, “you’re shooting in the dark.”

Systems Have you ever seen a NASCAR driver change his own tires during a race? No, they have pit crews. The crew keeps the car running so the driver can focus on winning the race.

BUSINESS IS LIKE BASKETBALL : YOU CAN’T TELL IF YOU’RE WINNING UNLESS YOU KEEP SCORE. 44

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And have you seen a pit crew work? They’re shockingly fast because they've got an efficient system. A big job is broken down into a series of smaller tasks divided among a well-trained team. When they’re starting out, a lot of property investors collect rent, manage their own books, handle upkeep—they take care of everything. To grow their business, though, they eventually need to hand those tasks to someone else, whether that's an employee or a third-party service provider, so they can spend their time on finding deals, raising money and other activities that generate revenue. For an individual entrepreneur, it can be nerve-wracking to let someone else take on a critical responsibility. Keep in mind, most businesses only have three to six processes that represent the bulk of their activities, Antone said.

THE DELEGATION TEST George Antone has a quick exercise that can show you when you should hire someone else to do a job for you. How much did you earn last year? Divide that number by 2,000. That's how many hours the average person works in a year, assuming a 40-hour workweek and 10 days of vacation.

If you brought in $100,000, then an hour of your time is worth $50. Those processes can almost always be boiled down to a repeatable set of steps that can be taught to someone else. (And someone else, and someone else, as your operations keep expanding.) Maybe you're a one-man band right now, but you should start documenting your systems so, one day, your teams can run them for you.

Teams Once you’re ready to bring extra help aboard, what position should you fill first? Antone recommends that you start with an assistant, someone who can handle administrative tasks and free you up for higher-value work. After a few months, he said, you’ll wonder how you ever got along without one. As you grow, though, it’s a good idea to have multiple people who can step into a role. Let’s say you work with one lender,

one appraiser, one contractor. If any one of those people gets run over by a bus (or up and quits), your entire operation is at risk of shutting down. If you’re a private lender, it’s usually good to be working with at least five borrowers. If any one of them goes down, you only lose part of your business and not the whole thing. “We don’t want everything to depend on one person,” Antone said. “We have a term we use—single point of failure.” Scaling up a business takes a different, more strategic way of thinking. But the rewards are worth it. As Antone said, “There’s a lot more money to be made at the strategic level.” For more information, visit www.thebankerscode.com. James Hart is the managing editor of Community Investor magazine.

Now, for the next two weeks, record everything you do at work, in half-hour increments. At the end of that period, go back and examine how you spent your time. Let's say you spent three hours a week on bookkeeping. Could you get someone else to do that work for you for less than $50 an hour? If so, then you should hire it out. You can use the time you spent on bookkeeping—and any other task you delegated—to put together deals, look for investments and generate income.

(913) 432-6690 :: editor@communityinvestormedia.com www.communityinvestor.com

IN DEPTH

YOU, INC.

Learn to Earn IT DOESN’T MATTER IF YOU’RE WORKING ON YOUR FIRST DEAL OR NO. 1,000. SUCCESSFUL ENTREPRENEURS NEVER STOP DEVOTING ATTENTION TO THEIR SINGLE MOST IMPORTANT INVESTMENT: THEMSELVES. by James Hart

ake a look at the top performers in any field of human endeavor— whether that’s business, sports or simply cooking the world’s greatest barbecue—and you’re going to find people who never stop learning more about their area of expertise. The same rule applies to the world of real estate investment. The people who operate at the highest levels have usually dedicated a significant amount of time to educating themselves, whether that’s through independent study, seminars or college-level courses. They’ve learned that knowing more than the other guy is a huge competitive advantage. The best part? It doesn’t have to take all your time. Success expert Brian Tracy encourages people to read one hour a day in their chosen field, enough to finish a book each week. Keep that up, and in five years, you’ll have learned enough to be a nationally recognized leader in your industry. Here are just a few of the many, many ways you can learn more and earn more. REAL ESTATE INVESTOR ASSOCIATIONS AND OTHER GROUPS Hands down, joining a real estate investor association is one of the best ways to learn from other people who are active in the field. Whether you’re looking for a full-fledged mentor or simply need the

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occasional piece of advice, being part of a REIA and attending regular meetings will plug you into the investor community in your town. And most REIAs host regular workshops on topics that can help you improve your operations or look for new ways to grow. Coast 2 Coast Real Estate Investment Association (www.c2creia. com) is a useful resource, with chapters across the country. Don’t forget other groups such as the Professional Real Investors and Managers Alliance (www.preimaonline.com) and the American Association of Private Lenders (www.aaplonline.com).

KAUFFMAN FASTTRAC Based in Kansas City, Kauffman FastTrac has been training aspiring and established business owners for more than 20 years. More than 350,000 people around the world have taken one of its 10-week courses. Programs are available for complete newbies as well as entrepreneurs who’ve been at it for a while. The organization regularly offers specialized training for military veterans, technology startups and others. The classes cover the basics of business ownership—feasibility, market research, financial goals—as well as strategies for achieving growth.

No matter where you live, your odds of finding a FastTrac provider near you are pretty good, and online versions of FastTrac training are available, too. U.S. SMALL BUSINESS ADMINISTRATION The SBA is probably best known for its government-backed loans to small businesses, but the agency also is a major player in entrepreneurship education. The SBA funds small business development centers at universities and community colleges across the country. These centers offer low-cost (and in some cases, free) classes on bookkeeping, marketing, business planning and other crucial skills. Better yet, these centers also provide one-on-one business coaching, and the coach is often someone who has operated their own company. You might have heard about SCORE, the Service Corps of Retired Executives, which recruits experienced businesspeople to serve as mentors for up-andcoming entrepreneurs. That’s an SBA program, too. The agency also supports Veterans Business Centers and Women’s Business Centers, which assist military veterans and women. You can find an SBA-backed education program near you by visiting www.sba.gov/tools/local-assistance. COMMUNITY COLLEGES Even if the community college near you doesn’t have a small business center, it is worth your time to check out the school’s standard catalog of credit classes and continuing education programs.

After all, a big part of community colleges’ mission is preparing students for the workforce, which means they offer courses on business management, real estate law, marketing and other topics that you can put to work immediately in your operations. Combine that with flexible scheduling and lower tuition—$3,260 per year at the average community college versus $8,890 at a four-year school—and you can see why nearly 13 million Americans enroll in these institutions. The American Association of Community Colleges has a “community college finder” tool on its website, www.aacc.nche.edu. YOUR NEIGHBORHOOD LIBRARY Believe it or not, one of the best— and least expensive—ways to become

a better entrepreneur might be right down the street. Obviously, the library is a great way to read more about real estate and entrepreneurship in general, but you might be surprised by how many libraries also offer business research services. Want to learn about the demographics of a particular ZIP code? Your librarian, armed with specialized databases and other resources, can probably help you answer that and hundreds of other questions. Depending on the city, many libraries also offer basic workshops on business planning and computer skills.

James Hart is the managing editor of Community Investor magazine. (913) 432-6690 :: editor@communityinvestormedia.com

Listen Up WITH COMMUNITY INVESTOR RADIO Join host Larry Muck every Friday for Community Investor Radio, an online show dedicated to the world of residential real estate investment. Every week, we talk to the industry’s leaders and offer up information that you can use to grow your business. Discover the behind-the-scenes stories of successful investors. Learn from national business experts. Get the knowledge you need to succeed.

YOUR HOST Larry Muck is the chair of the American Association of Private Lenders and possesses more than 30 years of banking and lending expertise.

Past shows can be downloaded at any time at www.smartcompaniesradio.com.

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RESOURCES

Living the Lesson > continued from page 20

Further down the road of her entrepreneurial dream is perhaps Wood’s biggest fan, Michelle Hummel, 36, who graduated in 2004 with an eCommerce Marketing Certificate from Cincinnati State. She credits Wood with helping her develop the know-how and confidence that led her to create several thriving online businesses, including MyFashionGuru.com and WebStrategyPlus.com

DON’T BE AFRAID TO FAIL. NEVER GIVE UP. “He’s always been a mentor to me,” Hummel said. “He’s really the type of person who makes you think not only outside of the box, but on different levels. “He’s inspired me in the sense that my dream job is to be an angel investor, because it’s almost like being a Jim Wood. Sure, I’d love to be fabulously wealthy—and I’m doing very well—but to me, it’s not all about making money. It’s about helping people.” Although Wood will soon bid adieu to Cincinnati State, that doesn’t mean he won’t continue to reach out to those who have the strong desire to financially better themselves. His future plans include creating a company that will give him the opportunity to speak to different groups around the country and also offer online courses about developing multiple streams of income. Wood’s method may change, but the message will be the same: Don’t be afraid to fail. Never give up. And be open to what others can give you. “The whole business of ‘I’m a selfmade millionaire’ that you hear people say—no, you’re not,” Wood said. “Nobody ever got there by being self-made. We all 48

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got there by having the expertise of other people along the way. You’ve just got to be open to listen to their expertise.”

Three Moves for Bigger Growth > continued from page 41

When you’re on your own, it’s easy to keep all of your knowledge in your head, but employees won’t be able to do their jobs unless they have a clear idea of what you want. Otherwise, they’ll be forced to guess and deliver work that doesn’t meet your vision, which increases the temptation for you to put that task back on your own to-do list. As your schedule opens up, you won't be quite as involved in day-to-day operations. You'll have time to set a larger direction for your company and seek out new opportunities. “As these entrepreneurs grow their business, their roles change,” Markey said. “They now are transitioning into more of a leadership role.” Viewing yourself as a leader requires a mental shift, and it can be helpful to take classes and read books on leadership. After all, leadership is like anything other skill, Markey said—it can be learned.

ADVERTISERS Affinity Group Management www.nreinsurance.com–P. 14 American Association of Private Lenders www.aaplonline.com–P. 26 B2R Finance www.b2rfinance.com–P. 52 The Banker’s Code / George Antone www.thebankerscode.com/cim-P. 8 BargainLocks www.bargainlocks.com–P. 7 Fairway America www.fairwayamerica.com–P. 5 FirstKey Lending www.firstkeylending.com–P. 15 Geraci Law Firm www.geracilawfirm.com–P. 9 Homevesting Online www.homevesting.com–P. 51 Investing Coast 2 Coast www.gomakesomethinghappen.com–P. 20 Loan MLS www.loanmls.com–P. 35 Lowe’s ProServices / Community Buying Group www.lowes-CBG.com–P. 3 Maple Bridge Funding, LLC www.maplebridgefunding.com–P. 32 The Mortgage Office www.themortgageoffice.com–P. 2 National Real Estate Insurance Group www.nreinsurance.com–P. 37 NoteSchool www.noteschool.com/hot–P. 25 Platinum Investment Properties Group www.pipgrouptaxliens.com–P. 51 Professional Real Estate Investors and Managers Alliance www.preimaonline.com–P. 27 Rate Tenants www.ratetenants.com–P. 5 RentFax www.rentfaxpro.com–P. 29

PHOTO PAGE

Everything’s Bigger in Texas A HUGE CROWD TURNED OUT FOR REI EXPO’S FLAGSHIP WINTER CONFERENCE AT THE GAYLORD TEXAN RESORT & CONVENTION CENTER 1 And Now, Your Host … 1

Tim Herriage, the REI Expo’s co-founder, addressed the crowd. (photo courtesy of REI Expo)

2 PREIMA Presents Twilla Miller, PREIMA’s new membership and program manager, greeted guests at the REI Expo’s exhibitor hall.

3 Big Ideas, Big Crowds The conference hall filled with attendees who were ready to learn. (photo courtesy of REI Expo)

4 Speaking Up 3

Tim Norris, president of National Real Estate Insurance Group and Affinity Group Management, was one of the speakers at this winter’s REI Expo. (photo courtesy of REI Expo)

5 Co-Founding Father Arnie Abramson is the co-founder of the REI Expo. (photo courtesy of the REI Expo) Send photos of your event to editor@communityinvestormedia.com.

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Putting Yourself—and Your Money—on the Line A LITTLE ADVICE FOR REAL ESTATE PROFESSIONALS THINKING ABOUT LIFE AS AN INVESTOR. Even if you’ve spent years helping clients evaluate potential investment properties or developing marketing plans for different projects, it’s a significant shift in perspective. When you become your own investor, you have complete reign of your own destiny. What property is going to give you the best return and why? You decide, not a client. Your team must make

thinner for the little guy; one wrong purchase can shut down a small investor. You’ll face an endless series of questions. What do you look for in a property? How do you find the best deals? Are the properties located in a tract development or nonconforming areas? Again, if you answer incorrectly, it’s your money on the line. The ultimate freedom of investing, though, allows you to pick your specific market areas and know your buyer's pool, so you can maximize your ROI. You are not tied into a commission structure, so you have the potential to make an incredible return that could be five times or more your normal pay—for a lot less work. As an investor, though, the bottom line is you. It all revolves around your timelines, your vendors and your decision to

WHEN YOU BECOME YOUR OWN INVESTOR, YOU HAVE COMPLETE REIGN OF YOUR OWN DESTINY, FOR GOOD OR ILL.

by Desirée Patno

n this ever-changing market, we’ve all had to adapt our business models. For some real estate professionals, that has meant jumping into the investor arena with their own money—to become fullfledged investors in their own right. It’s a greater risk, but also a greater opportunity to take control of your own destiny.

Community Investor mar/apr 2014

the most of its new leads, and if you burn through massive overhead while managing and selling your properties, you’re responsible. You’ll compete with big corporations who have endless funds to purchase property for their REO-to-Rental portfolios. And you’ll be squaring off against mom-and-pop shops who, even though they purchase fewer than five houses a year to fix up, are some of the savviest operators around. The good news is the business models are basically the same. Unfortunately, the margin of error is

purchase the property knowing all of the associated risks. Have a little faith in yourself. Take control of your career, diversify your income and put your experience to work for you with greater rewards. Desirée Patno is founder and CEO of both Desirée Patno Enterprises, Inc. (DPE), and the National Association of Women in Real Estate Businesses (NAWRB), the only national trade association representing professional women and women business owners in real estate. With more than 20 years of experience, Patno brings insider and “heels on the ground” knowledge to her mission of promoting women-owned businesses within the industry. www.nawrb.com :: www.desireepatno.com