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2 | think realty magazine :: july – august 2022 Call 800-600-1760 for a free 15-minute consultation with an Incorporating Specialist Learn more at CorporateDirect.com Garrett’s company, Corporate Direct , is the best provider of real estate asset protection. ◆ LLC and Corporation Formation in All 50 States ◆ Entity Maintenance and Compliance ◆ Registered Agent Services in All 50 States
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DESIGNER David Rodriguez
CONTRIBUTORS Luke Babich Katie Bean Donna Behrens Daren Blomquist Jenifer Calandra Grant Cardone Kurt Coleman Kori Covrigaru Rob Fuller Suni Goff Abhi Golhar David Jacobs Kyle Jones Robert Knight Zach Lemaster Arianne Lemire Bryce Malone Susan Naftulin Romney Navarro Tom Olson Gary Pinkerton Damon Riehl Jeff Roth
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4 | think realty magazine :: july – august 2022
FROM THE EDITOR
Entrepreneurship
I
he’s learned. He and many other contributors in this issue can give you some pointer’s on embracing the entrepreneur inside of you. A few things to highlight are the upcoming Think Realty Conference and Expo in Tampa from July 21-22. The conference will cover a variety of topics educating all levels of investors on how to “Build Wealth in Any Real Estate Cycle.” Visit www.thinkrealty.com/tampa to see our complete agenda and speaker lineup. And, as always, Think Realty’s GRC (Govern- mental Relations Committee) is working hard to ensure the voices of real estate investors are heard. Read their updates on page 74. There is always money to be made in real estate, no matter the cycle. Think Realty was created to give investors more time to create wealth, so they could fulfill their passion. Where are you in your real estate investing career? Have you started, or are you trying to scale your portfolio? Regardless of where you are, seek out the right resources and take the risk to set yourself apart from others. Actions speak louder than words. Say you can do it—and then do it! •
genuinely believe everyone possesses
an entrepreneurial spirit. We have all had that thought or idea that we “think” could be big or life changing. Fear is the biggest factor in whether
you embrace the entrepreneurial spirit or stop after the thought and do nothing. Sometimes the only thing separating you from those who are most successful is just that—fear. But as Michael Jordan, the greatest basketball player of all time, famously said: “You miss 100% of the shots you don’t take.” That quote has made many people see that if you do nothing, nothing happens. Like many others, I have been fearful of failure, scared to take the risk, scared that I would not financially be able to recover. That is the beautiful part about real estate investing: Resources are readily available to help you mitigate your risk. Check out the cover story on Garrett Sutton on page 22 to learn how his entrepreneurial spirit propelled him into the successful businessman he is today—and how he’s sharing the valuable insights and lessons
Here’s to your investing!
CARMEN FIELDS, MANAGING EDITOR
thinkrealty . com | 5
CONTENTS
INSIDE THIS ISSUE
22
COVER FEATURE
Garrett Sutton makes it his business to help other entrepreneurs succeed. by Katie Bean
Serial Entrepreneur Shares His Experience
6 | think realty magazine :: july – august 2022
INVESTMENT STRATEGY 8 Tips For Lending During a (Possible) Downturn
64 5 Keys to Success in Business Success in real estate investing and business hinges on these key principles. by Tom Olson
38 Getting Started as a Real Estate Investor An article series on navigating the private lending world by Damon Riehl
Just because the run may be nearing an end doesn’t mean your real estate investing career must also. by Romney Navarro 10 7 Tips to Guide a New Entrepreneur’s Path You may be in the driver’s seat, but you may not always know which direction to steer. by Abhi Golhar
40 Building for Success
PROFILE
The obstacles inherent in a construction project can be one of the most challenging aspects of starting a new business. by David Jacobs 42 Why a Slowing Market Can Present New Opportunities for Investors Three factors are key to investors’ ability to continue earning profits. by Susan Naftulin 44 Start Investing in Real Estate for Highest Long- Term ROI Start small and learn as you go. by Grant Cardone 48 What Is a True Entrepreneur? Throw away your contemporary dictionary definitions to get at the heart of what makes entrepreneurs tick. by Eddie Wilson 52 SOPs Are the Key to Business Success Providing a consistent customer experience depends on having standard operating procedures in place. by Greg Slaughter 54 Getting the Most Out of Your Network Effective networking, like anything, is a skill that needs to be exercised and honed. by Kurt Coleman 56 What Is Your Entrepreneur Community or Tribe? Finding and participating in a tribe can challenge you to develop knowledge and skills that lead to greater opportunities. by Jeff Roth 58 Marketing on the Go Six tips for putting mobile marketing to work for your real estate endeavors. by Jenifer Calandra 60 Optimize Your Real Estate Portfolio with PlanOlabs Our data analysis and visualization, cycle optimization, and industry research will help you achieve your REI goals. by Kori Covrigaru 62 3 Quick Tips for Becoming a Smart Investor Following these guidelines will make your life easier, help your business grow faster, and offer peace of mind. by Rob Fuller
66 Elevate Your Finances and Your Best Self with “The Wise Investor” by Rich Fettke by Donna Behrens
DESIGN
12 Corporate Opportunities
70 Do You Have What It Takes to Be an Interior Designer? Creating big, bold, and beautiful designs requires a confident decision maker. by Michele Van Der Veen
Do the rules apply to real estate? by Garrett Sutton
14 You Cannot Profit from Yesterday’s Growth But you can profit from future growth. by Kyle Jones 16 Retirement Accounts Vs. Real Estate Investing Investing in real estate, like saving for retirement, is a long-term play; however, it can set you up for a lucrative future. by Zach Lemaster 18 Tangible Assets in a Shrinking Economy Residential properties, especially rentals, can help you ride out a recession or market downturn. by Robert Knight 20 Transforming Communities Via Real Estate Innovations Real estate developers can solve complex societal issues by thinking creatively. by Steve Streetman OPERATIONS 26 7 Common Mistakes That Can Hurt Your Small Business You can beat the odds and experience success by following these tips. by Luke Babich
LEGISLATION
74 Update from Think Realty Government Relations Committee by Abhi Golhar
FUNDING
76 The Market for New Construction Rentals in Southwest Florida Southwest Florida is red hot, and funding for new construction rentals is creating even more opportunity. by Gary Pinkerton
MARKET TRENDS
78 Investors More Bearish, But Still Buying Aggressively at Auction Value-add investing strategy for distressed properties not highly dependent on rapid price appreciation by Daren Blomquist 80 Play the Odds If home prices start to slide, which cities are at greater risk for a correction? by Ingo Winzer
30 How to Thrive in Turbulent Markets
Consider these five steps to guide you to continued success. by Arianne Lemire
32 A 12-Step Program for Entrepreneurs
Follow this approach to create a successful business. by Bryce Malone
RENTAL PROPERTIES
36 Rethink How You Market and Grow Your Business Follow this approach to create a successful business. by Suni Goff
82 Maximize Profit and Minimize Taxes with Real Estate Investing by Abhi Golhar
thinkrealty . com | 7
INVESTMENT STRATEGY
LENDING TIPS
SPONSORED CONTENT
Tips For Lending During a (Possible) Downturn JUST BECAUSE THE RUN MAY BE NEARING AN END DOESN’T MEAN YOUR REAL ESTATE INVESTING CAREER MUST ALSO.
by Romney Navarro
f you are a real estate profes- sional, investor, or even casual
higher interest rates mean higher monthly payments. According to Redfin, in March/April 2022, the median home price across the country was approximately $408,000. The typical 30-year mortgage rate during that time was 5.27% (Federal Reserve Bank of St. Louis). If you apply the average down payment of 6% (ATTOM Data Solutions) to this $408,000 home, your monthly payment would be $2,122 per month. In contrast, four months earlier in Dec. 2021, the typical 30-year mortgage was 3.11%. If you apply that rate to the same house, with the same down payment,
likely slow down: People will still need houses and when people need houses, real estate investors thrive. But if affordability is an issue, how do you continue to operate a real estate investing strategy if the last 10 or so years have been (for all intents and purposes) easy? The answer may lie in the asset types in which we are investing. 3 TIPS As a private lender, we see all kinds of deals and have plenty of data to help inform our decisions and our strategy. Prior market slowdowns have also helped provide clarity in what the markets do during times of uncertainty. As we navigate this brave new real estate market, keep in mind the three strategies below to focus your time, money, and energy 1 FOCUS ON AFFORDABILITY. This does not mean that million‑dollar (plus) homes will be less attractive to buyers or less profitable for investors. It simply means the buyer pool has become smaller. By focusing on affordability (whatever that means to you), you can attract buyers who can no longer qualify (i.e., afford) the more expensive homes they were looking at during the last several months. By all measures, the buyer pool has and will shift down a notch in all property segments
I
onlooker, at some point in the last seven or eight years, you must have asked yourself, “When is this run going to be over?” Since the Great Recession of 2008-2010, real estate has been on fire just about everywhere in the country. By “on fire” I am referring to continued and record-breaking appreciation. Except for the mini-blip that occurred during the global pan- demic, we’ve been on a run of epic proportions. Just about anyone who participated in real estate during the last 10+ years has done so with some level of success, with many people experiencing tons of success. INTEREST RATE IMPACT As of the time of this article, real estate has not experienced much, if any, of a slowdown. But many factors are now pointing to a cooling off period, notably due to rising interest rates. In the first and second quarters of 2022, interest rates have surged, and they are scheduled to continue climbing while our government battles to get inflation under control. These interest rates directly affect a consumer’s ability to buy a home, specifically how much home they can buy. Most consumers looking to buy are primarily interested in their recurring monthly payment, and
the monthly payment would be $1,640 per month—a $482 per month (or 29%) difference.
This is what we need to prepare for. Less affordability means fewer buyers; fewer buyers are an indication the market is shrinking. To some, this development may be reason for concern. To others, it may bring opportunity. But many of us will be left wondering, “What’s the move?” Real estate as a whole, particularly new inventory, is stable. In fact, it is estimated that our country is running an inventory deficit equal to about 3.8 million homes (Freddie Mac, April 2021). This means there is enough buyer demand today (uncorrelated to rates) to absorb 3.8 million new homes. This is part of the silver lining of a potential and
8 | think realty magazine :: july – august 2022
3 T HE DEAL IS STILL KING. When in doubt, investors can find some comfort in knowing that one of the effects of the bull market of the last 10+ years is that capital is now abundant—more so than at any time in the history of the country. Deals, however, are scarce, making them the prize. Remember that 3.8 million housing deficit? There was once a time when this was not the case, and “capital was king.” Because this is not the situation anymore (and may not be for some time), if you find yourself in a position where you want to capitalize on a deal but interest rates and credit standards are too high to take advantage of an opportunity, don’t forget about capital partners. Instead of buying a home with a traditional mortgage or a private loan, consider a partner, whether it’s a one-off investor, an investor group, or an institution. Potential partners are sitting on more capital than ever and will likely be happy to share, because they don’t have the same access to deals that you do. •
(from starter to luxury homes). Focusing on homes at or around your respective market’s “median home price” will certainly allow you the luxury of a larger buyer pool and may result in quicker sales—a key in value-add investing when holding cost can take up so much of your bottomline profits. 2 IF THEY ARE NOT BUYING, THEY ARE RENTING. If fewer people are buying but still need a place to live, what do they naturally do? They rent. By focusing on a rental strategy, you may find that you can withstand the storm of a downturn (whether mild, moderate, or severe) as income producing properties “pay for themselves.” There are economics at play here too (higher interest rates also mean higher payments for landlords), but a property with income is always better during a time of uncertainty than a property without income. As an added benefit, should property values see any sort of a decrease, you may also find yourself “buying right” during a cool-down period.
Romney Navarro is the CEO of Streamline Funding. Having been with the firm in various capacities since 2008, today Romney concentrates on the company’s long-term growth initiatives by focusing on repetition, relationships and recruiting. Romney is also a partner at Noble Capital, Streamline’s parent company with his there having evolved from overseeing the lending company’s loan originations to overseeing the parent company’s marketing initiatives. A proud member of the American Association of Private Lenders, Romney has participated in the origination of over $1 BN in non-consumer investment loans throughout his career. In 2015, Romney launched the Investment Real Estate RoundTable (a Texas-based investment club with over 5,000 members), and in 2018 was the host of the highly-acclaimed Firestarters Podcast, known among real estate investors and developers as a premier source for those looking to scale their businesses. In his spare time, Romney appreciates an active outdoor lifestyle with his family and friends. In addition, Romney is an avid whiskey collector who one day looks to retire on a beach and finally enjoy the fruits of his collection. Above all else, Romney believes mastery can be achieved through repetition and continuously strives to lead his team to be masters of their respective crafts. This allows all involved to provide the best possible experience for borrowers. In 2019, this philosophy earned him and the firm the prestigious, “Think Realty Honors Private Lender of The Year Award.”
thinkrealty . com | 9
INVESTMENT STRATEGY
TIPS FOR ENTREPRENEURS
YOU MAY BE IN THE DRIVER’S SEAT, BUT YOU MAY NOT ALWAYS KNOW WHICH DIRECTION TO STEER. 7 Tips to Guide a New Entrepreneur’s Path
challenges, and rising interest rates like we’re experiencing now. Although no one can tell you exactly which actions to take, there are some basic guidelines that will help you figure out what your next steps should be. Here are seven tips that should help. NO. 1 Focus on One Objective at a Time You are the boss when you are an entrepreneur. You call the shots. Unfortunately, depending on your temperament, that can work against you. Distractions abound, and you can easily find yourself drifting from one task to another, never really getting anything done.
by Abhi Golhar
ne of the most common feelings you will experience as a new real estate entrepreneur is confusion. You have all the power, which means you must make the big decisions; however, that is easier O
said than done. There is no one who will tell you exactly what to do, leaving many new entrepreneurs and real estate investors grasping for answers, especially in a market of high inflation, supply chain
10 | think realty magazine :: july – august 2022
them the strength to endure the many hardships of entrepreneurship. NO. 3 Embrace Self-Care Being a real estate entrepreneur is a stressful endeavor. The potential isolation and constant uncertainty can be emotionally draining. Intellectually, you will be faced with solving problems most people will never encounter. Physically, you will sometimes spend sleepless nights working on your venture. It is of utmost importance that you take care of yourself and embrace a healthy lifestyle. Exercise, meditation, and good eating habits are a good start. If you do not pay much attention to your physical body, over time you will notice you are not as sharp as you need to be for your partners—or for yourself. Commit to never missing a workout or meditation session. NO. 4 Use the Internet One of the greatest advantages entrepreneurs in the modern era have is the internet. You can research pretty much anything, as long as you have a working phone and a stable connection. Legal documentation, advice, even employees/virtual assistants—you can find those resources and more online. So take advantage of that tool to help set yourself up for success. Are you a proptech entrepreneur? Having a product to sell is only the beginning. You must also have a clear idea about who you want to sell your product to. Defining your market clearly will not only allow you to properly angle your brand and marketing campaigns but also help you refine your product. If you are having trouble defining your market, NO. 5 Sort Out Your Market
consider the kind of person who would find your offering valuable and work from there. NO. 6 Find a Trustworthy Mentor When you are in uncharted waters, one of the best moves you can make is to find a guide. The good news is that entrepreneurship is an ancient tradition, so finding the right mentor is possible. You want someone who not only knows the industry you are in but also holds values similar to yours. That way, their advice will always be relevant and useful. If you are having trouble finding a mentor, reach out to your network. Eventually you will find someone who will hit all the right notes. NO. 7 Know When to Quit Most startups fail before their first year. If yours fails, that’s OK. That is just how it goes. Sometimes, no amount of skill or knowledge will help. Luck does play a role; sometimes you cannot fight fate. The mistake is insisting on pushing through, despite there being no logical reason to stay in the game. You can always find another opportunity or another deal. You cannot get wasted hours back. Although these are far from the only tips you will need, they should get you off to a good start. Your search for knowledge will serve you well, because a big part of being a successful entrepreneur is constant improvement. If you never stop learn - ing, you will always have a chance to make your dreams come true. •
Focus on yourself. Keep your eyes on the big picture, and work on one project at a time. One of the biggest challenges many entrepreneurs have is constantly chasing new ideas and strategies. Focus on one thing at a time until you master it, and then move on to the next. It sounds simple, but it’s not.
NO. 2 Follow Your Heart
It is difficult to work on a company or project you feel no love for. That is why many people choose to become an entrepreneur. They get to follow their passions. It is passion that allows them to enjoy what they are doing, and it is passion that gives
Abhi Golhar is a real estate investor, entrepreneur, a three-time nationally syndicated radio show host on the Wall Street Business Radio Network, and media figure, whose experience encompasses print, podcasting, radio, and television appearances.
thinkrealty . com | 11
INVESTMENT STRATEGY
CONFLICTS OF INTEREST
SPONSORED CONTENT
Corporate Opportunities
DO THE RULES APPLY TO REAL ESTATE?
by Garrett Sutton
f you invest in or syndicate real estate, what are your duties to
is in their core business. The duty of loyalty requires officers and directors to apprise the corporation (or LLC or LP) of “corporate opportunities.” The corporation gets to decide if it wants it or not. If the company doesn’t move forward, then the executive may be free to pursue it, or not. The decision may be at the company’s discretion. During their time in office, officers will likely discover business opportunities for the corporation. The officer may also have personal
business opportunities that are somehow related to the corporation’s business. For example, if the officer is an inventor who focuses on telecommunications products, the officer will likely be interested in all such business opportunities. The corporation may be able to pursue some opportunities the officer discovers for the corporation, but not others. If the corporation turns down one opportunity, is the officer then able to pursue it?
I
your investors? You owe them a duty of loyalty. But how far does that go? The issue of corporate opportu- nities is important. I wrote a whole chapter on it (from which part of this is excerpted) in my newest book “Veil Not Fail.” Before discussing its applicability to real estate, let’s review corporate opportunity in a business setting.
WHAT IS CORPORATE OPPORTUNITY?
A corporate opportunity is any investment, purchase, lease, or any other opportunity that is in the line of the corporation’s business and is of practical advantage to the corporation. If an officer or director embraces such opportunity by taking it as their own, they may violate their duty of loyalty, especially if by doing so their self-interest will be brought into conflict with the corporation’s interests. Will the officer be loyal to the company or to their own business? The conflict is clear. The simplest case involving a breach of the duty of loyalty is where a corporate executive expropriates a business opportunity that right- fully belongs to the corporation. For example, assume that a company distributes window shades, but a key executive takes the exclusive distributorship rights for a new type of awning. The corporation should have obtained the distributorship. It
12 | think realty magazine :: july – august 2022
GUIDELINES Delaware courts have established a test for corporate opportunities. If an officer’s self-interest comes into conflict with the corporation’s interest, the duty of loyalty can be breached. The law will not permit an officer to pursue opportunities that: 1. The corporation is financially able to undertake. 2. Are in the line of the corporation’s business. 3. Are of practical advantage to the corporation. On the other hand, if the corporation is not financially able to embrace the opportunity, has no interest in the opportunity, and the officer does not diminish his or her duties to the corporation by exploiting the opportunity, then the person may be allowed to pursue the opportunity. Evidence that the opportunity was presented directly to the individual and then not shared with the corporation may be used to show the corporate opportunity rules were not followed. In most states, the simplest way to avoid a problem is to present the opportunity to the corporation and allow it the chance to pursue or reject it. If the corporation cannot or will not take advantage of the opportunity, the employee, officer, or director may be free to pursue the opportunity. Though formal rejection by the board is not strictly necessary, it is safer for the whole board to reject a corporate opportunity. The decision shouldn’t be based on individual board members’ opinions. There must be a presenta- tion of the opportunity in some form. After the corporation has rejected the opportunity, and before pursuing the opportunity, the employee, officer, or director should unambiguously
disclose that the corporation refused to pursue the opportunity and ensure there is an explanation for the refusal. Resignation before completion of the questionable activity may not constitute a defense to liability arising from a corporate oppor- tunity. Courts have found liability even where officers and directors resigned before the completion of the transaction. Although there are no certain guidelines for determin- ing which opportunities belong to the corporation, controversy and liability may be avoided if officers use rigorous caution regarding corporate opportunities.
new projects without involving every investor?
The key to this issue is clarity. In a real-estate-based LLC operating agreement, be sure it includes state- ments that the principals are free to go after any investment. Although existing investors may be offered the right to invest in future projects (always a good marketing technique), the syndicators must be allowed the freedom to pursue all opportunities for their own account. Check your operating agreement and offering documents to make sure this important language is included. •
Garrett Sutton is a corporate attorney, asset protection expert, and bestselling author in Robert Kiyosaki’s Rich Dad Advisor series. He is the founder of
APPLICATION TO REAL ESTATE
Corporate Direct, which provides affordable LLC and corporate formation services in all 50 states. Sutton has sold more than a million books to guide entrepreneurs and investors. Garrett’s newest book, “Veil Not Fail: Protecting Your Personal Assets from Business Attacks,” is scheduled to publish in July 2022. For more information visit CorporateDirect.com.
But again, what about real estate opportunities? Many syndicators are pursuing several investments at the same time. They always owe a duty to do their best. But does that prevent them from pursuing
thinkrealty . com | 13
INVESTMENT STRATEGY
INFLATION
SPONSORED CONTENT
You Cannot Profit from Yesterday’s Growth
BUT YOU CAN PROFIT FROM FUTURE GROWTH.
by Kyle Jones
ou cannot profit from yesterday’s growth. The past is the past.
cost of borrowing to companies and consumers will undoubtedly cool down spending—and company bottom lines.
Smart investors aren’t scared of inflation. Some may even welcome it, because some real estate and business segments thrive when consumers tighten their belts. You cannot profit from yesterday’s growth, but you can from future growth. Unlike stocks, which typically shrink during inflationary times, certain assets, especially those tied to essential goods and services such as housing, food, and energy, appreciate. Smart investors are drawn to these assets to leverage inflation to insulate or even boost a portfolio. You shouldn’t always be jumping from one asset class to another with investments based on the world economy. It’s a fool’s errand trying to predict the direction of the markets. The ultra-wealthy don’t wait for a crisis to start investing smartly to hedge against inflation. They invest smart all the time. •
Y
On the other hand, yesterday’s growth may bite you if you don’t plan accordingly. In 2020 and 2021, the stock and crypto markets skyrocketed from the infusion of billions of dollars of stimulus money. Newbie investors took advantage of free money and the free trading platform Robinhood to play in the market. The buying frenzy intoxicated investors as they saw their stocks and crypto soar. That is no longer the case. THE HONEYMOON IS OVER Stimulus money has dried up, and stocks and crypto prices have fallen back to Earth. All that free money is coming home to roost in the form of inflation. Consumer goods giants Procter & Gamble and Nestlé have warned of continued price increases, with Nestlé predicting a cut in spending by U.S. consumers as wallets are pinched. One person who’s been in the news quite a bit lately, Elon Musk, recently commented that he thinks inflation is worse than reported and likely to continue through 2022. With inflation at 30-year highs, the Federal Reserve is taking action, but some wonder if it’s the right move. Raising interest rates to slow the economy to reign in prices will come at a steep price. Increasing the
SMART INVESTORS One can logically infer that a
slowdown in business will likely result in a slowdown in hiring, and even a reduction in the workforce. That’s not good news. Inflation scares investors. Lagging sales means dragging stock prices. But at least one group of investors is not worried: smart investors. Smart investors are not scared of inflation. That’s because they invest in a way that’s always prepared for scenarios such as inflation or recession. As inflation and inflationary fears drag down the public markets, smart investors are allocated to buffered assets or even propelled by rising prices. With payroll erosion from inflation, investors are seeking alternative income streams insulated from or, in some cases, propelled by inflation. To get an idea of what assets smart investors allocate to counter the effects of inflation, you look to the headlines for a clue: • The Cost of Rent Is Where Many Americans Are Feeling Inflation Most (wsj.com) • Inflation Hits Renters: 11% Overall Rent Increase in 2021 (dwellsy.com)
Kyle Jones is the founder and key principal of TruePoint Capital LLC, a private equity firm focused on owning and operating value-add multifamily assets
and ground-up construction. Jones is responsible for overseeing all aspects of the company’s financial activities, operations, and investor relations. In addition to TruePoint Capital, LLC, Jones is a co-founder of American Grid, which is a residential appraisal management company. Prior to being a full-time investor and entrepreneur, Jones worked in the corporate world in the high-tech sales industry for 13 years and worked for multiple Fortune 100 companies throughout his career.
14 | think realty magazine :: july – august 2022
HELP US rescue the children Operation Underground Railroad (O.U.R.) has made a significant impact in the fight to end sex trafficking and sexual exploitation by rescuing and supporting thousands of survivors in 28 countries and 26 U.S. states. We are honored to provide our support for this important initiative by donating $50 for every mortgage loan we close. Join in the fight today by visiting aaronchapman.com. Scroll down and click donate.
conventional financing
thinkrealty . com | 15
INVESTMENT STRATEGY
REI VS. RETIREMENT ACCOUNTS
SPONSORED CONTENT
Retirement Accounts Vs. Real Estate Investing INVESTING IN REAL ESTATE, LIKE SAVING FOR RETIREMENT, IS A LONG-TERM PLAY; HOWEVER, IT CAN SET YOU UP FOR A LUCRATIVE FUTURE.
by Zach Lemaster
e’ve all heard the question: Would you rather have $1,000,000 today or have a penny double every day for 30 days? What if we changed the question to: Would you rather contribute $200 per month for 30 years to a retirement account or $200 per month toward real estate? Would your answer change if we also said it would take you more than eight years to secure your first rental property (i.e., cash-flowing property) when saving at just $200 per month? People know they need to save for retirement, but many don’t start when they should. Many delay starting for W
a number of reasons—they’re paying off debt, waiting until they start a family, ensuring they have a stable job. Or, they simply think they have time to start.
the power of compounding in this example. Our out-of-pocket con- tribution was only $72,000, but the interest we gained was $199,879. Pretty remarkable! Many people focus solely on retirement accounts and what retirement accounts can provide. If this was our primary method for retirement, using the 4% rule, we would have an annual income of $10,875.16 in retirement, or $906.26 a month. (The 4% rule is a general rule when considering how much retirees can withdraw with a level of comfort their funds will last more than 30 years.)
INVESTING IN A RETIREMENT ACCOUNT
There are lots of different ways to fund retirement accounts, but for the sake of this example let’s focus on Roth IRAs. If we contribute $200 a month to a Roth IRA from the ages of 35-65 (assuming an average rate of return of 8%), we will end up with close to $271,879.71. We can see
16 | think realty magazine :: july – august 2022
• Property 2 takes an additional 4.2 years. We are now up to $600 monthly in cash flow ($200 original savings, $200 from Property 1, $200 from Property 2). • Property 3 takes 2.8 years, and we have $800 monthly in cash flow. • Property 4 … I’ll save you the agony of the math and just show you the total at 30 years. At 30 years, we will have a rental cash flow of $4,000 per month and own 20 properties. Let’s just wrap our heads around that: $4,000 per month in cash‑flow—even though we didn’t get to purchase our first property until 8.5 years into our savings. Compound interest has a way of exponentially increasing your retirement accounts. But real estate investing can outperform compound interest. WHAT WE DIDN’T CONSIDER We made some obvious assump- tions in these examples both for and against real estate investing: All rental properties cash-flow for $200 and the purchase price was only $100,000. What we didn’t even dive into was property appreciation or rental income increases. Rem- ember rental income has the potential to increase by around 2-3% each year. The average rate of return on the retirement account was “only” 8%. Even if we allowed for a 12% return, which is likely unrealistic, our retirement account would be $579,198. Using the 4% rule, that would lead to $23,167 a year, or just under $2,000 a month. That’s still substantially less than the returns on real estate.
We didn’t incorporate any large expenditures on our buy-and-hold properties, which would likely occur if we held them for more than 30 years. Although we do consider capital expenditures for large issues (e.g., roof, HVAC, appliances), holding a property for this long will likely impact our cash flow. We also didn’t evaluate what selling our properties (using the equity created from debt pay down and appreciation) and purchasing larger properties with higher rent would lead to. We didn’t look at all the tax benefits and potential securities that come from real estate investing. We didn’t account for our net worth if we were to sell the properties. We also didn’t evaluate taxes on selling properties. Although we are receiving rental income from all 20 properties, we do not own most outright and will have a mortgage on a vast majority—but we are still receiving that income. Although it is impossible to consider all the potential variables with real estate, it’s clear the potential upside of real estate investing far surpasses that of investing in your typical retirement accounts. Real estate, like saving for retirement, is a long-term play. However, it can set you up for a future that you could not imagine. The best thing is to learn about real estate investing to find out if it is a suitable strategy for achieving your financial dreams. •
INVESTING IN REAL ESTATE Now, let’s look at an alternative strategy for saving for retirement: real estate investing. Real estate investing (REI) can include a multitude of endeavors, but for this discussion, let’s focus solely on single-family buy-and-hold rentals. When we talk about REI, we are talking about purchasing a property and renting that property out to someone else. In doing so, we receive rental income that should cover the mortgage on the house, potential maintenance and repairs, large expenses (capital expendi- tures), and potentially a property management company (if desired). If the deal is executed correctly, our rental income should be more than all our expenses. So as the investor, we are creating passive income, known as “cash-flow,” on a monthly basis. The cash- flow generated is extra income that can be used for paying bills, entertainment, savings, or buying more real estate! Let’s reconsider the previous example in which we saved $200 per month for 30 years. This time, we’ll purchase real estate instead. So, we save $200 a month until we achieve enough for a down payment on our property. We’ll combine the cash flow we generate from the monthly rent on the property with our ongoing $200 monthly contribution to allow us to purchase more properties in a timelier fashion. Let’s see how it plays out! We assume all properties cash-flow $200 per month, a $20,000 down payment (20%) on a $100,000 property. • Property 1 takes 8.3 years to save the $20,000. We receive $200 monthly in extra cash-flow.
Zach Lemaster is the founder and CEO of Rent To Retirement. Lemaster is a
seasoned real estate investor who has accumulated a large portfolio of rental properties across multiple markets, including single family, multifamily, commercial, and new construction. He is passionate about educating others on the numerous benefits of real estate investing and how to use real estate as a means to create the lifestyle each person desires.
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INVESTMENT STRATEGY
RECESSION
Tangible Assets in a Shrinking Economy RESIDENTIAL PROPERTIES, ESPECIALLY RENTALS, CAN HELP YOU RIDE OUT A RECESSION OR MARKET DOWNTURN.
by Robert Knight
hen the pandemic began upending society, the market
prepared for its eventuality so you won’t join the panicking stampede out of the markets and into cash. Instead, you’ll remember that certain assets can perform well even during a recession. You just need to know which ones. The 2008 housing market collapse was a nightmare for homeowners, but it turned out to be a boon for some real estate investors. When a recession hits and home values drop, it may be a buying opportunity for investment properties. If you can rent out the property to a dependable tenant, you’ll have a steady stream of income while you ride out the recession. Once real estate values rebound, you can sell it for a profit. PEOPLE ALWAYS NEED HOUSING Housing is different from most investments because it is a basic need. People may hold off on buying a car or a new cellphone during a recession, but it would be quite rare for someone to decide to live on the street. You may hear stories during times of economic downturn of people los- ing their homes to foreclosure. But in the case of rental properties, there is always someone to replace any tenants who move out. If your rental property isn’t completely neglected, you probably won’t have much
W
sank for a few weeks and then recorded one of the greatest rallies in history. Stock prices rose the day rioters breached the U.S. Capitol, and they were up during the week that protests roiled many American cities after the murder of George Floyd. During this time of great upheaval, the market seemed to flash a con - trarian signal that things were going to be OK—economically, at least. But real-world problems such as inflation, supply chain disruptions, and the war in Ukraine have finally crashed the stock market’s party, prompting the Federal Reserve to raise interest rates significantly for the first time in many years. That action has sent stock prices plummeting. Some experts are even warning of a recession. The stock market is not a per- fect measure of the real economy. Unemployment is low, and consumer spending is still holding up. Still, more than a month of punishing losses can damage the country’s financial psyche. When the market is soaring, it’s easy to forget that what goes up can also come down. Economic slowdowns tend to be cyclical, which means another recession is in the future. Whether it’s fast approach- ing or still a way off, it’s wise to be
trouble finding tenants, even during a recession. In general, though, proper management of your proper- ties (including helping your tenants) is key to real estate success. RESIDENTIAL REAL ESTATE CAN BE MORE STABLE The pandemic has served as a harsh reminder of why commercial real estate isn’t always reliable. After all, the pandemic forced many businesses to close, even some that had been in business for decades. The commercial real estate market can be volatile. Commercial real estate is subject to market forces that don’t necessarily affect residential units. Individuals and families are not going to move out on the street because times are tough. But when the burger joint in the neighborhood stops selling burgers because no one is eating out, they may well have to vacate. People will always need a place to stay, no mat- ter what the U.S. average rent may be, which means that residential real estate will remain stable. As an investment, real estate is widely considered to be a more
18 | think realty magazine :: july – august 2022
stable investment because it is tangible. Tangible assets like real estate or gold don’t react as quickly to daily market fluctuations. Because real estate is separate from the daily trading activity that stocks experi- ence, it can provide stability when stocks are volatile. REAL ESTATE INVESTING IN A RECESSION When a recession takes hold, your first instinct may be to do some strat - egizing with your portfolio. Seeking out recession-proof investments can help balance stock holdings. Real estate is more stable than many other investments when the economy slows down. Rental properties can function as a natural hedge against market volatility. Assuming tenants can keep up with their financial obli - gations, a rental property can provide a steady stream of passive income even when the stock market is down. And demand for rental properties goes up during a recession because if homeownership is down, then people must live somewhere. Funding for real estate invest- ments also has many flexible options.
Getting a loan is one option for funding a rental property purchase. However, during a recession, lenders tend to tighten the purse strings, making it harder to borrow. In that scenario, using a self‑directed IRA to purchase an investment pro- perty could make sense and offer some tax advantages. That said, there are some guidelines to keep in mind. First, it’s important to remember that investing in real estate using your retirement funds comes with some strings attached. The property in question must be an allowable investment. That includes vacant lots, raw land, single-family or multi-unit homes, apartments, townhomes, condominiums and foreclosures. Mobile homes and timeshares, on the other hand, are generally excluded. Next, there are regulations regarding the property’s use. The IRS does not allow you to live in or use a property owned by you. Furthermore, any improvements or repairs to the property can’t be made by you or by a company that is owned by you or another disqualified person. In other words, if you run a painting business, you’d have to outsource painting your rental property to someone
else. Otherwise, you’d forfeit any tax benefits associated with owning real estate inside an IRA. Finally, remember that things like maintenance, repairs, property taxes, and even your earnest money deposit when buying the property must come from the IRA to avoid triggering tax consequences. For that reason, it’s important to make sure you’re planning ahead properly if you’re considering using a self-di- rected IRA to buy a rental invest - ment, and be certain your IRA has enough funds for any of these types of expenses. •
Robert Knight is the founder and CEO of White Stone Developments LLC. He has 15 years of experience in the real estate industry as an investor, contractor, and
Florida realtor. He is a local market expert in Southwest Florida, currently focused on new construction opportunities in the Cape Coral/Port Charlotte area. White Stone is a leading investor-focused builder helping build-to-rent investors find off-market land and build single-family and multifamily homes specifically designed for long- term rentals and Airbnb investments.
thinkrealty . com | 19
INVESTMENT STRATEGY
COMMUNITY INVESTMENT
Transforming Communities Via Real Estate Innovations
REAL ESTATE DEVELOPERS CAN SOLVE COMPLEX SOCIETAL ISSUES BY THINKING CREATIVELY.
by Steve Streetman
espite media depictions of real estate investors as greedy
D
and selfish, the investors I know are some of the most generous and caring people I have ever met. Each one wants to make a difference in their communities even more than they desire making a profit. Because real estate tends to be a conservative business with tried-and- true rules, innovation is often stifled. Things are changing, however, during this time of upheaval. Inflation is through the roof. Supply chains are failing. Things we have taken for granted are suddenly unavailable. How can you help your community during this time? What can you do differently for your residents, your businesses, your investors, your towns and cities? Our communities need to become more self-sufficient. Today our energy comes from a regional provider. Our water generally comes from a citywide system. Our food comes from all over the world. It is prepackaged and heavily processed to remove nutrients and add chem- icals, sugar, and salt. In many com - munities, we don’t know our neigh- bors. People are physically isolated even as we become more connected via social media and the internet. These outcomes are influenced by the way we develop and use real estate. And they can be changed if
20 | think realty magazine :: july – august 2022
you change how real estate operates. A true entrepreneur will see these challenges, find solutions, and transform their communities. Addressing all these issues may be complex and time consuming, but here are a few ideas that you, as an entrepreneur, can explore to improve your communities. ENERGY There are sustainable ways to provide energy for individual neighborhoods (of about 2,000 homes) that don’t require transport of electricity from far away power plants. These options extend beyond wind and solar. WATER Several companies have developed water from atmosphere capabilities that can supply adequate water for individual homes. Especially in areas where aquifers are failing, these systems can provide water security for individual homes or neighborhoods. FOOD New technology supports intensive indoor growing that can provide food for 3,300 people in a three-story building with a 10,000-square-foot footprint. Imagine if you added locally grown food as an amenity at your apartment complex or for your new neighborhood subdivision. Your residents would no longer be dependent on supply chains that, as we have seen, can fail. In addition, there are now methods to rejuvenate damaged soil quickly (in months instead of decades), to repair farmland (or your landscaping) damaged from intensive use of fertilizers and
Creating quality communities is the mission of real estate investors.
pesticides or from hazardous waste. Making food local and fresh will dramatically improve its nutrient value and taste, while making it less expensive for your residents.
to pay for goods and services is a huge advantage to your community.
RISK ASSESSMENT Although most real estate investors look for near-term threats to their investment (market cycles, physical condition, regulatory challenges), you should consider broadening your risk assessment to look at potential risks from climate change, geopolitical instability, rampant inflation, and workforce availability. New capabilities are emerging to provide this type of risk information. The smart entrepreneur will assess the risk from these threats and find ways to mitigate them. Now is the time to rethink how you invest in real estate. Are there ways you can change your investment strat- egies to address the risks mentioned here and, in the process, transform your communities into something new, better, and wonderful? Creating quality communities is the mission of real estate investors. True entrepreneurs find ways to turn these challenges into improvements for their residents and investors. When you solve problems like these, profits will come too. •
COMMUNITY Having local capabilities for
energy, food, water, and exchange means that your residents have more opportunities to interact with each other. Redesign of communities to emphasize common space and interactions is also very necessary. As we found during the pandemic, the enforced lack of interaction caused all kinds of psychological problems. At this point, creating a shared sense of community and having great options for gathering is a real health benefit. OWNERSHIP Tokenizing your property (creating a cryptocurrency that represents ownership of the property) can cre- ate liquidity for your investors and increase the value of your property. Tokenizing also democratizes the ownership so that your residents or tenants could protect their cash from devaluing. With true inflation at around 16% right now, the purchasing power of your investors’ and residents’ dollars is rapidly decreasing. Allowing them to own part of your real estate— which will maintain or increase its value—and still having the liquidity
Steve Streetman is a real estate consultant specializing in deal structuring and the use of cryptocurrency. Look for his book “Cryptocurrency and Real
Estate: How to Profit as Bitcoin and Blockchain Transform Real Estate Investing” available in paperback and e-book formats. You can also find out more at https:/CryptoREBook.com.
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