7 Steps for Real Estate Investing Like Warren Buffett

Most investors would agree that Warren Buffett is one of the greatest investors of our day and perhaps all time. He is widely known for his ability to pick winning stocks, which is what earned him the nickname Oracle of Omaha. However, his advice to investors can be applied to other areas like business and real estate investing. Forbes offered seven ways you can take to apply Buffett’s teachings to real estate investing.

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1) Look for quality

This first step may not obviously apply to real estate investing, but it can still by applied. Buffett focuses on high-quality companies that have strong fundamentals. He would rather pay a fair price for an excellent company than a little bit for a mediocre firm.

The same holds true when it comes to investing in real estate. If a property is ever being sold for less than what you think it should be worth, then you should be asking questions to find out why it is so cheap. Some issues can be fixed, and it is possible to find good deals. However, it is better to hold out for a quality property than to invest in one that is cheap but probably won’t be very good.

To identify quality properties, it’s essential to look for those with good bones. Cosmetic issues can always be fixed, often for very affordable prices. However, problems with the location cannot be fixed. Fundamentals are also important, so you should look for properties with attractive financials that make it a good investment as a rental property or property that can be flipped.

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2) Real estate investing is a business.

It’s also important that you view all of your real estate investments as a business. Buffett told CNBC in an interview in 2014 that investors should look at their stocks “as a business.” He advises investors to think like an entrepreneur when investing in stocks.

This bit of advice may be easier for those interested in real estate investing. After all, many properties will go on to become rentals after they’ve been fixed up a bit. Even flipping a property is good business.

The key here is to look for deals that just make good business sense rather than going with your gut feelings. Investments should be driven by data and financials rather than guesses or speculations.

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3) Stay in your circle of competence.

warren buffettWarren Buffett has also spoken and written time and time again about what he calls his “circle of competence. He advises investors not to invest in companies or industries they don’t understand. This is exactly why Berkshire Hathaway stayed away from technology stocks during the late 1990s and early 2000s. Buffett didn’t understand the sector, so he avoided it.

When it comes to real estate investing, staying within your circle of competence is much easier. Of course, this means that you should take the time to understand the business side of things before you ever get started with it.

It also means that you should take the time to understand every property you buy before you buy it. Before you sign on the line, you should already have a plan for what you will do with it, whether that involves turning it into a rental property or just outright flipping it. It’s also important to understand not only the property you intend to invest in but also the market it is in. If you don’t understand the property and the market, it’s best to move on and find something else.

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4) Don’t forget about the possibility of loss.

No investment is a sure thing, and real estate investing is no different. Thus, it’s important to realize that there is always some level of risk involved, no matter how much of a sure thing a property appears to be.

Before buying or investing in any property, you should consider what the worst-case scenario might be. This is a critical part of the process because it will bring you back down to earth if it feels like you’re getting too excited about a particular property.

Understanding the worst thing that could happen to any property will also help you figure out where your own risk tolerance stands and determine how much you should keep in reserve.

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5) Remain disciplined.

It’s also important to remember to follow real numbers and concrete data rather than your emotions. It’s very common and quite easy to have a knee-jerk reaction to movements in the stock market, but it is possible to have sudden reactions to real estate investments as well.

By creating a strategy and sticking with it, you will be able to keep your wits about you when everyone else is panicking or getting overly excited about the market.

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6) Look for undervalued properties.

One of Buffett’s main guidelines when it comes to identifying stocks to buy is looking for value stocks, which are those that are undervalued. It is possible to do the same thing in real estate investing.

Real estate agents set the price of properties after looking at the prices of comparable properties and speaking with their client about where they want to set the price. There will always be opportunities presented when prices are set lower than what the property is worth. If you have taken the time to get to know the market and the type of property you’re looking into, then you should have a good idea of when something is undervalued. This will give you a chance to take advantage of these underpriced properties.

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7) When the going gets tough, be aggressive.

Finally, there will always be difficult times in real estate investing, just as there is in other kinds of business and investments. Sometimes the market as a whole will not be doing very well, but an aggressive investor can still find opportunities, even if those opportunities won’t pay off for a while.

Like most value investors, Buffett is very patient when it comes to investing in underpriced stocks. He goes in with a long-term mindset, and the same should be true of real estate investors. The market may be down temporarily because there is an oversupply of properties, and that’s the time to buy. However, you may have to wait a while if you’re going to flip the property because you will need to wait until the supply is less to bring in whatever the property is really worth.

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This article is for informational purposes only adopted from a partner site: buttonwood.ca, it should not be considered Financial or Legal Advice.

Consult a financial professional before making any major financial decisions.

3 Steps To A Successful House Hacking

See main article on Biggerpockets: https://www.biggerpockets.com/member-blogs/10359/87977 

Buy Real Estate with Little or No Money Down

This catchphrase, Buy Real Estate with Little or No Money Down, is pretty ubiquitous in the Real Estate Investing world and there is some truth to it. The truth is that you are able to buy real estate with little money down, and what I am referring to here is to do with House Hacking.

First, you may ask: what is House Hacking any way?

House Hacking basically means that you can buy a small multifamily property to live in (Duplex, Triplex, or Fourplex) and rent the other units out to tenants. As a result, you pay a subsidized mortgage, as the rents from the units cover all or most of your mortgage.

Since you are occupying one of the units and if you are buying a property for the first time, there are incentives from the government to help first time homeowners. There is a provision for the first time buyers to put little money down: 3.5% as a downpayment to purchase a property (note: there are other instances in which you can use FHA loans that we would not go into here).

So, hooray! You are able to use a little bit of money to be a Landlord and start collecting rent checks (or Venmo alerts). Not quite. There are 3 QUICK METRICS to look out for when analyzing small multifamily properties.

1. CRIME

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LOW CRIME This may sound pretty obvious; however, during your excitement of buying your first property, you might not take this account for a variety of reasons.

Or you might make a big mistake some investors make by trying to make an "educated" guess of the crime in the area during a visit to the area and think "hmm.., it seems to be a safe area". This isn't going to cut it. Moreover, what is safe to one person might not be safe to another.

TIP: Use the property address on websites such as Trulia or similar sites to get intel on the crime status of an area. For Trulia, it is best to choose an area with the LOWEST CRIME.

2. RENT TO VALUE [RTV] RATIO

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1% RULE As you start looking at a lot of properties, it can become increasingly difficult to analyze a lot of deals quickly. Consequently, you want to look at these deals quickly and make a decision about whether you want to take a deep dive or not.

TIP: The Rent To Value [RTV] ratio is dividing the total monthly rental income over the total value (or asking price). For instance, if the total rental income from a duplex is $2,000 per month and the Seller is asking $200,000, then this might be a deal you want to take a closer look at because the RTV is >= 1%. Hold on before you go putting in an offer, there is ONE last metric to look out for.

3. RENTERS TO OWNERS [RTO] RATIO

Normal 1574802370 Max Bottinger Gup8 M Cv Ssf0 Unsplash 50% RULE After buying your property, you want to ensure that you are able to get your units rented as quickly as possible. Not surprisingly, there is a direct correlation between how many renters are in a particular area to how quickly you can rent your unit.

In order to mitigate any risks of having your property sit on the market for any longer than needed, it is best to have the Renters To Owners [RTO] metric at the forefront of your mind when evaluating your next small multifamily or your first multifamily property.

TIP: Use your zip on a website called City Data to find out the ratio of renters in your particular zip code. Typically, my rule of thumb is to be above 50%. That said, you should remain somewhat flexible and pay attention to your local markets.

SUMMARY

You are able to start your Real Estate Investing with little money down by House Hacking. However, you want to increase your chances of success and mitigate any risks by using the three metrics:

Crime Rent To Value [RTV] ratio Renters To Owners [RTO] ratio Normal 1574803117 3 Metrics

If you are currently House Hacking or learning about it, what are your tips and tricks to a successful #HouseHack?

🤔 What is An Accredited Investor, How Can You Become One ✓, and why are they so important🔎?

Where It All Begins

Apartment syndications are considered securities, which means they are governed by federal and state securities laws. Securities include promissory notes or “investment contracts” between a general partner and the passive investors. The Securities Act of 1933 requires that the sale of securities must be pre-approved and registered by the Securities and Exchange Commission (SEC) unless it falls under an exemption.

There are numerous federal and state exemptions with the most popular exemption in apartment syndication being Rule 506 (b). Rule 506 (b) allows general partners to raise an unlimited amount of money from an unlimited number of Accredited Investors and up to 35 Sophisticated Investors, however, the general partners can’t advertise the syndication deal to get passive investors. General partners must rely on and prove previously established relationships to raise capital for their deals.

The second common exemption is Rule 506 (c), which allows general partners to advertise their syndication deals to potential passive investors, however, they may only raise capital from accredited investors.

Accredited Investors Vs Sophisticated Investor

Below we break down the two exemptions that apartment syndication deals usually fall under and compare the differences between accredited and sophisticated investors.

Accredited Investor

• A single person who brings home a net income of $200,000 per year for the two most recent years

• A couple who has a joint net income of $300,000 per year for the two most recent years

• An individual or couple who have a net worth of $1,000,000 or more, not including their primary residence

Sophisticated Investor

• A sophisticated investor is someone who has the necessary real estate knowledge and experience in both financial and business matters, to be able to properly evaluate all risks associated with the potential apartment syndication deal.

How to Become An Accredited Investor

The good news is that there is no class you have to take, no certification you have to obtain, and no fee that you have to pay to become an accredited investor. To verify that you are an accredited investor you just need to verify that you meet one of the three criteria above.

If you are single, make sure that you had a net income of $200,000 or more for the most recent two years, and if you are using joint income, then double-check that your combined net income is $300,000 or more for the most recent two years.

To qualify as an accredited investor based on your net worth, you will need to calculate your net worth, making sure to exclude your primary residence. This means that you add up all your other assets like your investments, bank accounts, vacation homes, etc. and then subtract any liabilities like loans, home equity lines of credit, etc. The remaining value will be your net worth.

For example:

Mark and Mikayla have a joint net income of $250,000 per year, so they don’t qualify as accredited investors based on their income, however, they think that they have enough in assets to qualify them as accredited investors.

Mark and Mikayla have a triplex that is valued at $400,000, which they owe $100,000 on, they have a single-family rental valued at $200,000, which they owe $50,000 on, they have $150,000 in their savings account and $500,000 in their retirement accounts.

Their net worth is $400,000 - $100,000 + $200,000 - $50,000 + $150,000 + $500,000 = $1.1 million. This qualifies them as accredited investors.

Why Is It a Big Deal to Be An Accredited Investor?

Even though you can invest in apartment syndication deals as a sophisticated investor, you can be severely limited by the syndication options that are available to you. As we mentioned earlier, both Rule 506 (b) and Rule 506 (c) allow for accredited investors to be passive investors in syndication deals that fall under these exemptions. However, sophisticated investors may only invest in syndications that fall under Rule 506 (b), which prohibits advertising the syndication deal. This limits the number of potential deals that sophisticated investors come across and can invest in, and some crowdfunding investment platforms only allow accredited investors to invest in their deals.

Accredited investors are viewed by many syndicators and general partners as more reliable investors, as their income and/or net worth provides them a cushion against any risks that may be associated with a syndication deal. Meanwhile a sophisticated investor may invest less frequently and also have larger portfolio risk to any one deal. You can avoid a bad deal and minimize your risk by working with an experienced syndicator.

At Dwellynn, the team is an experienced syndication group that will only pursue the best of the best opportunities and take every available measure to protect your investment.

>>Learn How We Can Help You Get Started<<

✌️🙌 2 Steps to Quickly Evaluate a syndication opportunity Like A Pro

Once you’ve made the decision to start investing in syndication deals, naturally, your next step will be to start looking for a syndication company to work with, or you may even start looking for a specific deal to invest in.

You’ll most likely start your hunt through a simple Google search, and wind up with page after page of search results for different syndication companies and deals. You’ll submit your contact info on some websites, and suddenly, your email will be filled with investment opportunities.

It may feel overwhelming at first, seeing percentages, financial projections, timelines, and other information, over and over again. Everything will look like a potential opportunity until you can successfully vet a potential syndication deal and pick the best of the bunch.

Below, we will go over 2 quick steps to help you break down and filter through potential syndication deals in under 5 minutes (minus the brain overloads and headaches).

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1) Determine if the type of deal you’re reviewing is right for you.

There are numerous types of apartment syndication deals, from development, to value add and stabilized properties. The first thing you want to do is make sure the deal matches your investment goals and your appetite for risk. Do you prefer lower-risk stabilized opportunities, or would you take a higher risk for a higher return opportunity, like a development opportunity? That is the type of question you need to ask yourself, and if the opportunity doesn’t match your investment profile and goals, then you should move on to the next opportunity.

This is an example of the type of key points you need to identify:

• Type of asset: B-class multifamily

• Market: Houston, TX

• Hold time: 6 years

• Minimum investment: $50,000

• Deadline for funding: 30 days from now

You want to look at these key factors before diving into the business plan and preferred returns. You could look at a potential deal and realize that the property is a B-class multifamily, but you want more profit potential with a value-add property, or maybe the deadline for funding is 30 days and you would need 45 days to gather your funds. These are quick factors to identify to assist you in weeding out the opportunities that don’t match your criteria.

If the opportunity doesn’t fit your requirements, then move on, and save yourself the hours you would have spent going over the investment summary. If the investment opportunity fits your criteria at first glance, then it’s time to dig deeper and go through the summary.

2) Take a look at the numbers.

There are many figures and projections that you’ll see in an investment opportunity presentation or summary. The most important numbers and percentages to understand will relate directly to your potential profit in the deal. A good summary will provide the following information:

• Preferred return (“pref”) - ex. 8%

  • The preferred return is a threshold return that limited partners, or passive investors, are offered prior to any profit distribution to the GP.

  • A preferred return is provided to ensure that the passive investors will receive the first portion of any available profit distribution before the GP get their split. This helps make sure investors getting their interest payments is a top priority.

  • The preferred returns can vary depending on many factors, such as the experience and track record of the GP, however, the most common preferred return is usually 8% or higher.

  • If you invested $50,000 into a deal that offers the passive investors a preferred rate of return of 8%, then you should expect to get 8% of your $50,000 in payments paid out during the year. This would be around $4,000/year and $333.33/month if the payments are paid out to the investors in monthly cash flow distributions.

• Average cash-on-cash return (CoC) - ex. 9%

  • The cash-on-cash return is the relationship between an investor’s cash flow from the property and the initial equity investment.

  • This metric is the cash yield of investment, calculated by dividing the annual cash return by the initial investment.

  • If the cash-on-cash return is 9%, and the preferred return is 8%, this means that the passive investors will receive a return higher than 8% during some part of the life cycle of the syndication.

• Average annual return (AAR) - ex. 20%

  • The average annual return represents the total return that you can expect in a syndication deal, averaged over the total hold time of the property.

  • The metric takes into account the sale of the property and the corresponding gains.

  • If you invested $50,000 into a syndication deal with a 20% average annual return, this would mean that you can expect an overall return of $100,000 spread over 5 years, which would be 100% of your original equity investment.

    (100% return/5 years = 20% average annual return)

• Internal Rate of Return (IRR) - ex. 17%

  • The internal rate of return (IRR) takes into account the time delay in receiving your returns over the holding period of the property. If the holding period is 5 years, you will not receive your returns at one time, and you will not be able to earn interest on the returns or invest those returns. This delay is taken into account in the internal rate of return.

  • This metric is important to compare across deals to analyze the time value of money. Two deals can have a similar AAR, but one may depend on a high return at sale while the other may cash flow day one and provide more consistent annual yield

• Equity Multiple - ex. 2.0x

  • The equity multiple gives you a general idea of how your investment will grow. This figure will use the cash flow distribution that the passive investors receive, as well as the profit distribution that the passive investors receive when the property is sold.

  • If the equity multiple is 2.0, then you can expect your $50,000 investment to turn into $100,000 by the end of the life cycle of the project.

• Minimum investment - ex. $50,000

  • As implied, this is the minimum amount of capital that an investor will need to contribute as a passive investor to be apart of the syndication deal.

• Hold time - ex. 5 years

  • This will be the projected length of the life of the syndication deal. At the end of the holding period, the GP will organize and facilitate the sale of the apartment community, and the passive investors will receive the remaining equity investment, as well as their distribution of additional profits. During the time, your initial investment will be locked into the deal, and you will not be able to liquidate the funds.

Hope this helps explain the process of evaluating a syndication deal quickly!

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