Hello from the Depths of an MBA Program

I know I should focus this blog, but if you ever flip through my idea journal, you’ll see that focus is not my strong point (which is how HBS came about in the first place).  I’ve learned that I need to expend enough energy to at least decide if an idea may have legs.  Then I need to find additional people to run with the idea (with me), so the idea can go somewhere.  Well, I’m not going to talk about ideas in this post (that’s for later), this is simply a recap of the past seven or eight weeks.

I have enough material for 10 posts, but I’m tired and time is short (bedtime was about 45 minutes ago…).  Life has been busy since I wrote my last post.  I can very quickly recap:

1) Friday before classes started, I got a phone call from one of my residents to inform me that a van drove into the living room.  I received this phone call at 11.59pm; I had been asleep for about two hours, so I was really groggy and trying to make sense of what my tenant really meant by “a van is in the living room”.  Believe me, it’s just not worth speeding 60MPH while 3x over the legal limit to try to get to the bottle shop before it closes at midnight (see when I got the call from my tenant…).  There are about 1000 complications to this crash…the driver was violating parole, the driver was drunk, the insured (van owner) has not spoken with either insurance company yet (???)

I received a quote for construction and the repairs have started (ever ponder how to suspend an entire story of brick?):

Really nothing more to report on this one.  Questionable tenants moved out, so I can renovate their side (with the help of my brother!) and get that rerented.  Hopefully generate a little more cash flow, but again the renovations were REALLY unintended, so there may be a near term cash crunch.

2) I’m going to brag here a little, so if you don’t like bravado, move to ‘3’ below.  School is going well.  Received grades for the first Mod (essentially a quarter; 4 mods per year, two year program).  Grades are A, A-, A-, B-.  Overall a 3.53.  One of my professors took the time to write me about my contributions in class.  Here is what he had to say “As you well know, I enjoyed working with you this fall.  In fact, I looked forward to our class time together with some anticipation, which is a really good sign for someone who has been teaching MBA’s for more than 25 years now.  I thought we created a good experience together this year. Thank you”.  I realized that I haven’t received feedback like that from any superior (boss or otherwise) for probably eight years.  It honestly felt really good to read that email.

3) The Flip….well, it hasn’t sold yet.  I’ll have to make some tough decisions about it (eg keep as a rental, drop the prices, or ????).  Back to running some numbers.

4) Because “idle hands make the devil’s business” (or something like that), my wife asked that I finish remodeling our 2nd floor.  Destruction is complete and I’ve started installing bits and pieces.  My brother helped with sanding this weekend and left looking like a coal miner.  There was a random dead animal that fell from the ceiling.  Looks bigger than a mouse and was surrounded by a bunch of nuts…maybe a chipmunk?  I also found two carefully folded $10 bills from 1950 (worth $200 after inflation).  Also, found one potentially unrequited love note.:

My help is a TON of fun to have around (this was right before my helper strapped on her tape measure, grabbed her hammer and started rolling carpeting to be thrown in the dumpster)

IMG_20141009_074628812 (1)

5) Odds and ends:
– Drive to 5 is still moving forward, albeit slowly
– I’m biking to school most days now, so gas consumption is significantly lower.  Should have details at the end of the year.
– I’ve been reading “Lincoln” by David Herbert Donald.  It is so packed with information that it is a slow read, but entirely worth it.  Look for a book report, probably in 2015.

A Lesson from the Past (#1)

Quarry Climbing

In order to make sure you do not fail at ANYTHING in life, you must study the past.  More specifically, you must study the history of your current pursuit in which you want to succeed.  Studying art history does not help with an environmental engineering degree.

I didn’t understand this when I was studying to become an engineer.  (Note to my parents: Don’t read the next few sentences)  Rather than study the history of my specific engineering specialty, I spent my time studying investment theory (specifically stocks) and rock climbing techniques (I was an avid rock climber).  Needless to say, I struggled through my engineering degree.

Fast forward a few years.  I’ve graduated from college with my engineering degree, quite a few good texts about investing, and too many pairs of climbing shoes.  My current studies now focus on real estate investment.  However, in addition to modern day investment theory, I also study the causes of problems in the past; the Great Depression, Black Tuesday, etc.  Understanding how these events came about and unfolded allows me to forecast the future, to avoid and not repeat the mistakes of the past.

I started to read “How I Turned $1,000 into Three Million in Real Estate — In my Spare Time” by William Nickerson.  In the first chapter, Nickerson has a section titled “Opportunity is Always Knocking”.  While I do struggle with depression at times, I firmly believe that there is an overabundance of opportunity, you only need to look for it (See: Opportunity).

In Nickerson’s “Opportunity” section, I came across the following quotes [edited for length]:
“In every year, in good times or bad, investment opportunities are always knocking, in spite of the pessimists who perennially lament, ‘There is no opportunity today.’ … The chances for success today offer less risk, by far, than those taken by our pioneer settlers and pioneer founders of government and industry. … Like the editors to whom I first submitted the initial chapters of this book, some of my friends now rationalize, ‘Nobody could start today with nothing as you did and build a fortune.  There just isn’t the opportunity in these times.’ … one of our friends summed up the depressing consensus of many, ‘The most you can look forward to is Social Security, and if you’re lucky a small [401k]. … Our economics instructor advised our class, ‘You might as well realize that the time for opportunity is past.  The best you can hope for is to keep a steady job and stay off welfare.  Nobody will ever again be able to build an estate big enough to produce an independent income.'”

How much of what you just read is appropriate today?  Everyone will say the perfect opportunities have already passed us all by.  They are sort of right.  The opportunities for yesterday have passed us by…the opportunities of tomorrow have yet to arrive.

Are you ready for them?

PS. Nickerson’s comment was published in 1959.

Book Report: Investing in Duplexes, Triplexes & Quads by Larry B. Loftis, Esq.

Investing in Duplexes, Triplexes & Quads by Larry B. Loftis, Esq.

IMG_20130912_085239_952QUICK LOOK:

Recommended buy?  Yes
Amazon Link & Price:  Investing in Duplexes, Triplexes & Quads  — $14.49
Original introduction to book: Biggerpockets.com
Reading Difficulty: Taking candy from a baby
Quick Synopsis: Investing in small multifamily properties of 2-4 units is the way to financial success.

1) Why Real Estate?
2) Why Residential Multifamily is the Best
3) The Making of Millionaires
4) Creating Wealth from Thin Air
5) Buy and Hold, Pyramid, or Refinance?
6) Using Brokers to Your Financial Advantage
7) Finding Your Property
8) Valuation of Your Property
9) Verification and Due Diligence
10) Making Offers
11) Closing and Your Costs
12) Managing Your Property
13) How to Sell and Pay No Taxes
14) The Fastest and Safest way to Wealth
15) Where do You go from Here?
Appendix: Real Estate Appreciation by Metropolitan Area


“Investing in Duplexes…” is a recommended read on Biggerpockets.com; I had also seen the book at Barnes & Noble and flipped through the book.  The book is not a difficult read.  I’m a slow reader and I was able to finish the book in about four hours.

This book offered a few new ideas and techniques I plan to start incorporating in my investment strategy.  Most of the ideas in this book are refinements of my existing techniques rather than entirely new techniques.  One example: when purchasing a property, close late in the year but early in the month.  If you close late in the year, there is a credit for real estate taxes.  By closing early in the month, you will receive 90%+ of the rent as a credit at closing and your mortgage payment won’t be due until the beginning of the following month.  I knew about the prorated rent as well as the tax ‘benefit’, but had never considered the benefits of using both of these techniques to significantly reduce my down payment.

“Investing in Duplexes…” is divided into four sections: 1) Real Estate Wealth Building; 2) Buying; 3) Holding and Selling; and 4) Your Wealth-Building Program.  Each section is roughly broken into four chapters.  The real meat of Larry Loftis’s book is in Sections 2 and 3.  Section 1, “Real Estate Wealth Building”, covers the Why of real estate investment.

Larry Loftis firmly believes the key to increasing your personal wealth and planning for retirement is through continued investment in residential real estate, specifically residential multifamily real estate.  Loftis defines residential multifamily real estate just as Fannie and Freddie do: 2-4 unit buildings that are either owner occupied or non-owner occupied.  Loftis specifically makes a case to purchase quads or triplexes.

Throughout the “Real Estate Wealth Building” section, Loftis describes how he and others profited from the purchase and ownership of real estate.  He makes the case for real estate through a variety of examples.  Loftis invests in the Florida real estate market, with a focus on Orlando, and New Smyrna Beach.  Many times I find examples in real estate investment books hard to swallow: they could simply be invented by the author to illustrate a point.  However, an aunt and uncle of mine used to live in Orlando, so I have a personal connection with the area.  I knew some of the areas Loftis mentions and I also knew about the rent and appreciation in the area, which added significant credibility to Loftis’s arguments.

Probably the best chapter in Section 1 is Chapter 5, “Buy and Hold, Pyramid, or Refinance?”  This chapter really struck a chord for me because Loftis lays out an investment strategy which he refers to as “Refinance”.  This is the same strategy I have been using and will continue to use for the foreseeable future.  My agent and my banker never really described this strategy, nor could I find it specifically referenced anywhere else, which lead me to doubt my own plan.

Loftis recommends purchasing a property, rehabbing the property over a one year period and refinancing the property at the end of the to then reinvest the cash from the refi in another property.

To me, this investment plan seemed like a no-brainer.  You still control the asset, yet you have access to the equity.  Properly managed, there should not be an issue with this plan.  Finally, I found someone who agrees with me.  Maybe I had read about this plan in other books, but Loftis really hit a home run for me with this strategy.  Chapter 5 is a Must Read.

Section 2, “Buying” thoroughly describes the purchasing process and how to reduce your down payment costs.  Most of these items I had already learned but my implementation needed to be tweaked to help improve my returns.  In some instances and situations, by tweaking my strategy during the purchase process, I may reduce my down payment by up to 40%, which really improves the cash-on-cash return.

In Chapter 9, “Verification and Due Diligence”, Loftis’s law background is quite evident.  The chapter opens with the quote from President Reagan “Trust, but verify.”  Loftis encourages you to use the numbers provided by the seller as an initial starting point when evaluating a potential purchase…but to then call to verify each piece of information you are provided including taxes, utilities, service companies, etc.

I have never called to verify a specific piece of information when I’ve purchased a property; I’ve only used the seller supplied information.  I almost got burned once with some water/sewer bills and simply figured “caveat emptor” ruled these transactions.  After reading Loftis’s book, I plan to do some more due diligence on these purchases prior to signing the deed.

As you would expect, Section 3, “Holding and Selling” is about property management and reduction of taxes during the sales process.  Loftis’s book was not really geared toward property management, and Section 3’s two chapters (Chapters 12 and 13) are very slim.  Overall, I was not very impressed with Section 3.  However, Loftis does finally get through to me to look for rental properties for middle to high income earners.  To date, my investment strategy has been to invest in low to low-middle income rental properties, slowly building cash flow to purchase the middle to high income rental properties.

With my strategy, I do sometimes have to deal with bonehead tenants.  For example, I recently had a tenant tell me that they got tired of paying bills, so they refuse to pay their water and sewer bills (my reaction: “Come again??”).  Loftis argues that middle to high income earners will generally not try to pull a stunt like that.  That being said, I do have other tenants, in the same town as the ones mentioned above, who are low income earners, but who are incredibly polite, courteous and do pay all of their bills on their own.  They just aren’t great money managers.

Section 4, “Your wealth-Building Program” was also a very slim section.  In this section, Loftis lays out the three ways he sees to create wealth with real estate: Buy and Hold, Pyramid, and Refinance.  When he lays out these sections, the process is more of a bullet point presentation which really helps to sum up the book.  If I were young with no pets or kids, I would very seriously consider Loftis’s “Pyramid” program.

In this program, Loftis recommends living in one unit of the 3- or 4-unit building you have purchased, fixing that unit, then moving to another unit in the same building, and repeating until you have refinanced or sold the fully updated multiplex.  Then you repeat the process.  Loftis’s plan is much more nuanced than I just presented, and I highly recommend reading, understanding and considering his “Pyramid” plan.

Overall, I recommend purchasing and reading this book.  I say ‘purchase’ because you can then take all the notes in the margins you want, dog-ear the pages and stick the book on your shelf for future reference.