4-Step Real Estate System PDF

4-STEP
R E A L E S TAT E
SYSTEM
By Dolf de Roos
Audio Highlights
and Exercises
© MMIV DR. DOLF DE ROOS ©MMIV NIGHTINGALE-CONANT

4 - S T E P R E A L E S TAT E SYSTEM 2
TA B L E O F C O N T E N T S
Step#1: Investigate an Investment’s Potential 4
Step #2: Preparation is Key 18
Step #3: Planning Prevents Impulse-Purchasing 35
Step #4: Pro-activity Reaps Profits 49

4 - S T E P R E A L E S TAT E S Y S T E M 3
WELCOME!
The following printed material is a transcript of Dolf’s audio sessions, along with some
accompanying exercises. Please use this material to help reinforce what you’ve heard
on the audio and give you extra insight into the topics that Dolf covered throughout the
sessions.
Best of luck with all your real estate investments!

S T E P # 1 : I N V E S T I G AT E A N
INVESTMENT’S POTENTIAL
Let’s look at the seven points, the seven things that these self-made millionaires tended
to have in common. Number one: Make investing your hobby. That is very important. If
you do not love this investing game, you’re not going to be very good at it because you’ll
come home and instead of making the extra effort to look at one more property, you’re
going to watch that TV program that you’re so hooked on.
And by the way, since I’ve mentioned the word TV, let me give you my humble views on
that. I think, singularly, one of the most destructive things in Western society is the
television set. It’s destructive in terms of everyone who watches it and emulates all the
bad stuff on there, and have you noticed how most of the sit-coms don’t have lovey-
dovey things like, “Honey, I just love you so much. It’s such a thrill to be with you.” That
wouldn’t sell, right? They always have bickering and arguments, and it doesn’t matter
which program you’re looking at, it’s bicker and argue and all that sort of thing, and then
the violence, the rapes and murders. We see so many of these crimes that our
sensibilities get reduced. We get numbed and we think, “Well, that’s not that bad. It
happens all the time.”
And most importantly, for us as investors, it’s an incredible time waster, because you
come home; you say you’re tired; let’s just turn it on. You flick through a few channels,
and believe me, you’ll find something worth watching. And you say, “Well, I don’t really
want to watch this, but the short I just saw for the next program, that looks pretty good. I
might just watch that, too,” and before you know it, two hours have gone by, two hours
that you could have spent making $50 if you’d found that one deal or $50,000 or maybe
$500,000, because the funny thing about deals is they don’t know how many “could
have’s” are involved.
And let me tell you one thing: the effort involved in doing a half-million-dollar deal is
about the same as the effort involved in doing a $50,000 deal, and believe it or not, it’s
about the same as doing a $5 million deal.The number of contracts you have to sign is
about the same. The number of mortgage documents and caveat releases and anything
else, it’s about the same. So, if it takes the same effort, why not do a big deal? Makes
sense, right?
So, make investing your hobby. When it’s your hobby, you’ll come home and you’ll want
to work on your hobby rather than turning the box on. In fact, one of the best things you
can do in your life is to get rid of the TV for a whole year and see whether the quality of
your life goes down. See whether you really are a lesser person because you haven’t
watched the news every morning and every night, to make you depressed about so and
so’s escaped and this has gone wrong in the world; it’s not empowering at all.
4 -S T E P R E AL E STATE S Y STE M 5
And then the next sentence: If you’re already a player in this investment game, why not
make the commitment to being a good investor? Well, that goes without saying, all right.
Start right now and one day you will see the income from your investments surpass the
income you earned from your job.
What happens when your income from your investments surpasses the income from
your jobs? Remember what Buckminster Fuller said, “Your wealth is your ability to live a
certain number of days forward if your income stops, if you lose your job.” Well, when
your income from your investments surpasses the income from your job, how wealthy
are you? You could live forever, right? Very wealthy. So, that’s a great thing to strive for.
Number two: Pay yourself first. Many people make this mistake, and here’s how it goes.
They earn money, just like on this chart here, then they pay taxes – well you have to
pay taxes – and then they spend money. You’ve got to buy food, and gas or petrol, and
all those other things, clothes, and then if there’s anything left, they end up saving that.
So, this is the pattern: You earn money; you pay taxes; you spend; and if there’s
anything left you save.
Have you ever noticed that when you adopt that pattern, very often there’s nothing left
to save? Well, you needed those clothes. You needed this; you needed that. Often
people say, “If only I earned $50 extra a week, then I’d be fine. Then I could save.” And
do you know what happens when they get that raise? Their spending increases. They
can afford slightly better clothes or get a new car a little bit sooner, and you never end
up saving.
Whereas what you should be doing is you should earn first then invest.Then you spend
and what’s left over can go to taxes. Because remember, if investing is your hobby, then
a lot of your expenditure will be on things that are incurred in generating income, so
they are tax-deductible, right? So, this is a far healthier scenario. It’s just another way of
highlighting point two in this article.
Point three: Know yourself. It’s very important. We tend to try and find out everything
about everyone else, but do we really know ourselves? That’s why we’ve been going
through some of these exercises that we went through before. What kind of an investor
are you? How do you like to balance your portfolio? Could you stomach going 100
percent into property? Would that be wise for you? Do you want to have it spread out?
Should you have a little bit in everything, a little bit in property, a little bit in shares, a bit
of mutual funds, unit trusts, certificates of deposit, Treasury Bills, derivatives, options,
futures contracts, antiques, diamonds, baseball cards, everything?
4-S T E P R E AL E STATE S Y STE M 6
If you’re spread so thinly, then you might as well just buy a contract on the economy,
because if the economy goes up a little bit, some of your investments will go up, others
will go down, but on average you’ll go in sync with the economy. You’ve got to figure out
where you want to specialize. And maybe you want to specialize in two or three things,
but believe me; you won’t be as good in three things simultaneously as you could in one
at a time. So maybe, if you don’t want all your money in one of these items, you spread
it out a bit. You invest yourself and work your hobby in your favorite area, but you assign
some of your money to experts in another area.
Now, that brings me to a very crucial point, and it’s one that I don’t know how I can
make it clear enough, and it goes as follows: If you ask advice of anyone on any matter
related to money, you have to ask yourself the following question first: Does this person
earn the bulk of his or her income by doing exactly the same thing that they’re telling
you to do, or does this person earn the bulk of his or her income by selling the advice?
The difference between those two tells you how much credence to give the advice. Do
you follow what I’m saying?
Does this person make their money by doing exactly the same thing as they’re
encouraging you to do, or do they make their money by giving you the advice and by
hoping a lot of people do what they tell everyone to do, because then they’ll earn
money? And the money they earn, do they spend it on the thing they’re telling you to
spend it on, or do they whip it away into something else? How people handle their own
money is a pretty good indicator of how much they believe their message. Is everyone
clear on that? Okay.
Number four: You can’t play safe with cash. What do we mean by that? That means that
if you just use cash, you’re running a very risky enterprise. You’ve all heard that
expression: You want to get high on drugs, in particular opium, the acronym OPM, other
people’s money. That’s one of the great advantages of property. Other people are ver y
willing to let you use their money. They benefit from it.They get an interest rate, but you
can benefit even more. So, think hard about how you use your cash and whether you
want a cash investment or something that’s a bit more sophisticated.
Number five: Never ask an encyclopedia salesman if you should buy an encyclopedia.
It’s very true. Reminds me of the chap who was selling Bibles door to door. And he had
a phenomenal sales record; almost everyone bought one, and all the other salespeople
couldn’t figure out how he did it, because this poor chap was also a stutterer, and they
just couldn’t figure out how a stutterer would manage to sell so many Bibles. So they
asked him if he would mind if they came along with him one day, and he said, “No, sure,
that’s fine.”
So, they went along, and this is how it went. He knocked on the door, and the person
would answer the door, and he would say, “Eeeexcccusse me, bb, bb, bb, but, but, but I
sell Bb Bb Bb Bibles. Wh, wh, wh, wh, wh, would you like to tt, tt, tt, tt to buy one or dd,
dd, do you want me to tt, read it tt to you?” And they invariably bought. So you see, you
can use anything to your advantage. You just have to have a different way of thinking
about it.
The same is true if you have people trying to sell you a particular investment. Figure out
what’s in it for them. In fact, I always say that the financial advice industry would change
phenomenally if there were something in it for financial planners to make money out of
you buying real estate. At the moment, in general, they don’t. And I’m not saying that all
financial planners scoff at property; a lot of them encourage it, but I’m sure that the
world would change if some of them could get a commission of some sort out of putting
you into property. Right now they’ve got a huge incentive into putting you into other
schemes where they get upfront fees or trail commissions.
Now imagine it, you’re a person that people come to for advice, and they come to you
with millions of dollars, and if you say, “Well, go out and buy a property,” you don’t get
anything other than your hourly rate. You might make $500 for that hour. But if you put
them into some investment where you get 3 percent upfront, well there’s $30,000
already. That’s pretty nice. And you get a quarter of a percent per year. There’s a huge
financial incentive for you to talk them into that. So think hard about that.
Point number six: The billionaire’s secret, simple secret, and it goes as follows, If you
want to make money, really big money, do what nobody else is doing. We’ve touched on
this, and we’re going to come back to it. We said before, you have to be counter-cyclical.
When everyone else is buying properties because they say, “Interest rates are low. It’s a
good time to buy,” maybe that’s the time for you not to be buying. When everyone else is
selling properties because interest rates are high or who knows what else is going on,
maybe that’s the time for you to be buying. So, they’re saying exactly the same thing
here. Be different. Study the market. Don’t just do it to be different; have a reason for it
and then move on.
Point number seven: Carpe diem, seize the day. All great investors know that if you are
to avoid bitter regrets over opportunities missed, you must get in the habit of responding
promptly when opportunity beckons. And it reminds me of that story of the 82-year-old
lady who was talking about having reached an old age, and she said, “You know, when I
look back, I don’t so much regret the things that I did that I shouldn’t have done. I regret
the things that I didn’t do that I could have done.” Right, and isn’t life like that the same
for all of us? You’ve got to figure out what opportunities do you not want to miss out on
and get in there.
And by the way, is it wrong or bad to make a mistake? Of course not. We learn from our
mistakes. If you never make mistakes, you never learn. Imagine learning to ride a
bicycle without ever falling over. One of the hardest things they say, as a parent, is trying
to get your kid to ride a bike and letting go of the bike. You’re running along beside them
not letting go, knowing that if you don’t let go, they’ll never learn, but if you do let go,
they’re going to fall over and hurt themselves. It’s a tough call, but you know you have to
let go. Some of you run out of steam and you let go.
It’s the same with skiing. Those who don’t want to fall, they’re scared of falling over, they
learn more slowly than those who don’t really mind. Heck, it’s all soft snow anyway, and
you fall over 10 times, but you learn about balance and all that sort of thing. So, you’ve
got to get in there, boots and all, and figure out how is it that you want to run that.
Read these every now and then, because these are the secrets to getting ri c h .T h ey
really are.
I want to explain to you why I think property is not just a little bit better than any other
investment, but orders of magnitude better, 10, a hundred, a thousand times better, and
it astounds me. I still get people who interview me, for instance, say things like, “Well
last year the stock market went up by 6 percent, and property only went up by 5
percent, so, how on earth can you, in all good faith, still tell people that property is a
good deal?” And I want to twist that around and put it to you.
Assume for a moment that properties did only go up by 5 percent and that stocks or
shares went up by 6 percent. What is your response to that? Because if you don’t have
an answer, if you don’t think, “Well, hang on a minute. That is so patently ridiculous,”
then you don’t yet get it, and I know that’s why you’ve come here. But there are some
major, major reasons why that analogy is not valid, and I want to explore them now by
using an analogy.
Imagine you have a lump of cash, $100,000 cash, and you are going to invest that cash
in a number of investments. Firstly, if you were to spend $100,000 cash on stocks or
shares, how many dollars worth of stocks or shares could you buy with $100,000 cash?
A $100,000, right. It’s not a trick question.
Now, I know in some extenuating circumstances, you can buy shares on margin calls.
However, it only applies to about 30 percent of the shares available, and then only to a
certain limited number of people in the market. It’s not very common. If the value of
those stocks or shares comes down, the institution that lent you the money does what’s
called a margin call. For most people who are investing in the stock mar ket, they put up
$100,000 cash to buy $100,000 worth of shares.
Let’s compare that with real estate. If you have $100,000 cash and you want to buy
property, how many dollars’ worth of property can you buy with $100,000 cash? A
million, you all say. Now is that relatively easy? Some say, “How is that possible?” What
do you need in order to buy a million dollars’ worth of property with $100,000 cash? You
have to get a mortgage, a loan, and that’s possible, right?
Now, I can still see the frowns on some of the faces, and I hear, “10 percent.” So you’re
saying that the problem with getting a mortgage is that you now have interest to pay,
and on a $900,000 mortgage at, say, 10 percent per annum, you have to pay a
whopping $90,000 a year, right? Where’s that money coming from? Fair question? Rent.
You’ve got an asset worth $1 million that’s generating income.
So, let’s for the sake of simplicity assume that our $1 million asset is generating about
10 percent return, which is $100,000. We’ve got a $900,000 mortgage. We’re paying
$90,000 interest on that, because the interest rate happens to be 10 percent in our
simplified example. That means you are still ahead. So, there’s the first difference.
When you buy real estate, you can buy many dollars’ worth more of real estate than you
can when you’re buying any other asset, because banks will lend readily and willingly
on real estate, whereas they don’t lend readily and willingly on anything else. They do
lend money on other things, but they don’t advertise it. And you can pick up any
newspaper, anywhere in the Western world, and there are many, many ads of banks
saying, “Do you want to buy a property? Come and see us. We’ll waive the application
fee” or “You’ll go in the draw to win a trip,” or they’ll give you all kinds of incentives. They
want to lend money on property. All right. That’s the first comparison.
The second one goes as follows. When you’ve bought $100,000 worth of stocks or
shares with your $100,000 cash, the day you bought them, what are those stocks or
shares worth? A hundred thousand, that’s true. That’s simplified. The reason for that,
and we’re negating the effects of brokerage fees for a moment, the reason why it’s
worth $100,000 is, the market determines the price.
The value or the price of a stock or a share is that one price at which willing buyers
meet willing sellers. So, by definition, there is only one value, and everyone agrees on
that value. So, your portfolio is worth $100,000. The next day it might have gone up a bit
or down a bit, depending on what the market, as a whole, determines.
Now, let’s go back to this property. You bought a million dollars’ worth of property with
$100,000 cash and a $900,000 mortgage. The day you bought that property what was it
worth? I hear $100,000. Well that’s the cash. Some say a million. Well, that’s what we
spent on it. Is it not possible that you spent a million dollars buying a property that truly
is only worth $700,000? Sure it’s possible. And is it not equally possible that you spent a
million dollars buying a property that’s worth 11/2 million? Of course it is. It depends on
what it’s worth as to a whole bunch of factors.
Now, I know that some of you are thinking, “Hang on a minute. Why would anyone in
their right mind sell a property worth $11/2 million for 1 million?” Well, maybe if we put it
in terms more akin with house prices, maybe you’ll understand it. Why would anyone
sell a house that’s really worth $250,000 for $190,000? And I tell you what; I can give
you a hundred reasons.
Imagine, for instance, that they have signed a contract to acquire a new house, and
they’ve got a time restriction.They have to settle or close on it within three weeks and
time is running out. So, as they get closer to their settlement date, the price on their own
property comes down. Or maybe they are too stingy to get a valuer or an appraiser in to
figure out what that property’s worth.They think they know. Heck, the one up the road
sold three years ago for £190, so that must be what theirs is worth, whereas it truly is
worth £250. Or maybe they bought it in 1956 for £280, and they think they’re ripping you
off by getting $190,000 for it, whereas in actual fact it’s worth a lot more. Or maybe they
didn’t want to get a real estate agent involved because they wanted to do the deal
themselves. They talked with half a dozen people who didn’t really know what it was
worth. The list goes on and on and on.
What very often happens is it’s unfortunately a divorce situation, where they just want to
sell the property and do it this week, just get rid of it and split the proceeds. Or maybe
four kids were bequeathed a property. One wants to live in it, the second one wants to
rent it out, the third one wants to turn it into a commune, and the fourth one’s trekking in
the Himalayas. So, their respective lawyers and powers of attorney get together and say,
“Look, the simplest thing to do is simply sell the thing fast, split the proceeds four ways
and let’s call it a day.”
Whatever those reasons, they exist. So, it’s very possible that you can buy, with your
$100,000 cash, a property for a million dollars that is actually worth $11/2 million.
And then I want to come to my third point. Remember, the first point was you can buy
many more dollars’ worth of property than you can stocks or shares for a given lump of
cash. Secondly, the value of what you buy may be way above what you actually pay.
And here is my third point. If you buy $100,000 worth of stocks or shares for $100,000
cash that happens to be worth exactly $100,000 the day you buy them, what can you
personally do to increase the value of that portfolio? Nothing. You can be a bit more
creative than that. Is it not possible to write a letter to the directors of the company
wishing them a good day? That’s about it, right?
Whereas if you buy 1 1/2 million dollars’ worth of property for a contract price of $1
million, using only $100,000 cash, what can you personally do to increase the value of
that property? Clean it up. Mow the lawns. A new tenant. You can paint it. All these
things are true. And if you don’t believe that you can buy a $60,000 house with grass
that’s 11/2 yards high, and mow the lawn, and then put it back on the market and sell it
for $80,000, then you’re not living in the real world, because that happens. I’ve done it.
And you know the beauty of this whole exercise? I mean you make $20,000 profit,
right? The beauty of the exercise is that you don’t even need to mow the lawns yourself.
You can get someone in to do it, and they would do it.They did this job; it was very high,
for $50. And it was one of those classic situations where I had three twenties, and I
said, “Look, that’s all right.” And he said, “But it, it was only $50.” I said, “Believe me, it’s
worth $60 to me.” All right. In another case, you just paint the front of the building. You
don’t sometimes even have to paint the sides.
But I ask you, why is it that some people can look at a house and see tall grass and
say, “It’s not even worth 60,” when a week later they drive by and they see that the grass
has been cut, and they say, “Yeah, that’s worth 80.” Different views, right? It’s a different
way of seeing the world, and that’s why I say when I look at a property, it’s a different
property from when any one of you look at it.
And there are people in this room who have looked at properties that I’ve looked at, and
they see them differently again. In fact, we have a number of people here that I’m going
to bring up later on. We’ve got Margaret down in back there, for instance, who has done
phenomenally well in the last 12 months. She’s been on a program we call the
mentoring program, and that has changed the way she has looked at properties, but it’s
gone beyond that.
I have learned, from her, things that I didn’t realize I didn’t know. And do you see what
I’m saying? Sometimes when you don’t know something, you don’t even know that you
don’t know it. So, you don’t know that you ought to go out there and learn about it.
But there are angles and twists and ways of dealing with properties that you would not
believe, and we’re going to explore some of those. I’m going to whet your appetite right
now with a little example, because I know some of you are thinking, “Yeah, this is really
fun and exciting, all the stuff we’ve been covering, but it’s still psychobabble.” So, let’s
talk about the nitty-gritty stuff.
Imagine you’ve got a house. It’s a rental house, three bedrooms. It’s out in the suburbs,
but it does not have a garage or a carport. Do you think it’s possible to build a carport
for $1,000, six poles and a roof with a bit of a slope on it? If you’re really getting
sophisticated, you might run a gutter around the side. But you can do that easily, right?
And do you think it’s possible that you could raise the rent by $20 a week if you had
such a carport? Yeah. It’s possible, right, I’ve done it. So, it’s very possible. So you
spend $1,000 to build this carport, and the rental goes up by $20 a week.That’s very
possible. How much is $20 a week over a year? It’s about $1,000. So, ask yourself this
question: Before you came this morning, did you think it was possible that I could tell
you, within the first couple of hours, how you can make 100 percent return on a cash
investment? You did? Well you were very optimistic. Good.
You know we can do a lot better than that. I’ll show you how in a minute. But there is
one way where with a simple, small sum of $1,000, you can make 100% return on your
money. Would you like to hear how, with that same carport and that same increase in
rental, you can make a lot more than 100 percent? Do you think it’s possible? Yeah, well
why would I pose the question? You’re cottoning on to me.
How about doing it this way? You know that when you get more rental from a property,
the value of the property goes up, and something we’re going to explore tomorrow is the
term “capitalization rate.” And what it means is you take the rental income and you
multiply it by the capitalization rate to work out what the capital value is. Now, typically
this is around 10 percent, the cap rate. So, you divide it by the cap rate or you multiply it
by ten, and that gives you the increase in value. So, if you’ve got an extra $1,000 a year
coming in rent, then the value of that property has gone up by roughly $10,000.
So, you go to the bank and say, “I’ve revalued this property. I’ve had a registered valuer
or appraiser go through, and he’s given me a new appraisal on this property, a new
valuation. It’s gone up by $10,000 because of things we’ve been doing.” They will then
lend you, perhaps, 70 percent or 75 percent or 80 percent, whatever their lending ratio
is, on that increase in value. So, you can borrow an extra $7,000 easily because you’ve
built that carport there, and of that $7,000, you use $1,000 to build the carport because,
remember, we didn’t pay for it out of our back pocket. So, you’ve got $6,000 left.That is
$6,000 of cold, hard cash, foldies that you guys could put in your pocket, but you’re too
scared to because you might lose it. But you’re changing your attitudes on that, right?
So, you’ve got money that you put in your pocket. By the way, is that money taxable? It’s
not, right? Is it income? No, you’ve borrowed it. So, it’s not income. It’s not taxable. You
can spend it as you please.
Now, you also have a $7,000 mortgage. Let’s assume you’re paying 10 percent interest.
That means you’re paying $700 a year mortgage interest, but remember you’re
collecting $1,000 a year because you built this carport. So, you’ve got a surplus of $300.
In other words, when you build your carport, you have a choice of two things. You can
either pay for that carport out of your back pocket, in cash, and get 100 percent return
on that cash investment, $1,000 a year, or you don’t use any of your own money. You
build the carport. Get the place revalued. Increase your mortgage. Pay for the carpor t
out of this mortgage. Put $6,000 of the money that you’ve created into your pocket with
no tax obligations, and have $300 a year surplus income that’s indexed for inflation and
that you have forevermore coming your way.
And my question to you is as follows: If you had such a house, why would you not do
that? You’d be a fool, wouldn’t you? Now, could it be that when you go around looking at
properties, if there is a property there without a carport or a garage, it could be worth a
bit more to you than the next guy? Is that possible? Certainly. It’s worth a bit more to
you, because you know that you can do these things to it.
Now, some of you are saying, “Well, all that effort for a mere $1,000 or a mere $6,000.”
Well, let’s ramp it up just a little bit, and I want to explain a property that I personally
own. I still own it. It’s got three shops on it. There was a bit of vacant land out the back.
And I had a problem with this vacant land because weeds used to grow there, and
tenants would call me, and I’d say, “Well it’s in your lease that you really have to look
after that,” and they wouldn’t, and then I’d end up sending someone in with weed killer,
and so it went on.
So, I thought, “What can I do with this piece of land?” And I worked out that you could
easily fit five garages on this piece of land, which you could use just for storage
purposes. So, I made three phone calls. One was to a building contractor. I said, “I want
a quote on having five garages built with certain specifications, tilt slab, concrete, long-
run roofing iron, alarms, tilted doors, power, all that sort of thing.” The quote came in at
$33,000 to build these five garages.
I did some research on what they would generate in rent. In this particular town, they
generated $40 a week each, which for five of them is $200 a week or $10,000 a year. I
went ahead. I made another phone call. I said, “Build them.” I made another phone call
to an appraiser and said, “I want you to put a new valuation on this property.” It had an
extra $10,000 of rental coming in.The cap rate was 10.5 percent, which means the
increase in value was just under $100,000. Call it $100,000. I made my final phone call,
and that was to the bank. I said, “I’ve got a new valuation. It’s gone up by $100,000. Will
you lend me an extra $70,000?” They said, “Yes.”
I used $33,000 of the $70,000 to pay the builder. How much did that leave me? Thirty-
seven thousand. I could put that $37,000 in my pocket. Were there any tax obligations?
No, tax free. Plus, I had an asset generating $10,000 a year in rent. I had mortgage
outgoings of $7,000. It was actually less than that. So, $3,000 a year coming in, surplus
revenue. Was I wise to do that? Would I have been silly not to do it? Sure.
Now, do you think you can ramp this up, yet again, another order of magnitude? Do you
think it’s possible to make three or four phone calls and have an asset go up in value by
a million dollars? You put $330,000 in your pocket with no tax obligations, and you get
$30,000 a year coming out forevermore indexed for inflation. Do you think that’s
possible? It is.
And if you don’t do that with whatever building you’ve got, where you can do it, then
you’re silly. You’d be a fool not to do it, and that’s the whole point. You’ve got to star t
looking differently at these properties. You’ve got to say to yourself, “What twist is there
with these properties that I can apply, that suddenly makes it worth more to me than it is
to the vendor?”
EXERCISES
1. Have you truly made investing your hobby? In the space provided below, write
down how you are currently pursuing your hobby. How much time do you spend
each day/night on it? How much income have you earned up to this point? After
you’ve done this, write down ways that you could possibly do it better. Create goals
for yourself and set specific dates for their accomplishment. How will this make you
a better investor?
2. Ask yourself the following question: Am I a saver or a spender? What pattern do

you follow? Do you earn – spend – save? Do you earn – save – spend? Write down
ways you could pay yourself first, in order to better your financial situation. List all
the benefits of paying yourself first. Now, list the disadvantages. Compare the two
lists and create a “realistic” schedule for paying yourself first.
3. How well do you know yourself? What kind of an investor are you? What’s your
comfort level regarding your investments? Where do you want to specialize? Write
down the answers to these questions and then create a list of priorities you can act
on immediately. You need to develop an area of specialty, in order to become a
successful investor. Knowing yourself will help you to develop that area. Good luck!
4. Don’t use cash. Use OPM, other people’s money. In the space below, list five
ways you can use other people’s money to help develop your portfolio. If you do
need to use cash in an investment, how much are you willing to put up? Be totally
honest with your answer.
5. Carpe Diem. Seize the day. All great wealth is created by responding promptly
when opportunity knocks on your door. Below, write down the ways you can take
control the next time a “golden opportunity” presents itself to you. Will you
procrastinate or will you act quickly? Remember; don’t be afraid to make a mistake.
Mistakes are only learning experiences that will help to make you better. Go for it!
6. In this session, Dolf makes the claim that investing in property can be a hundred
times better than any other investment. Look at your own portfolio and compare it
with a property you are considering investing in.What is the cost of the property? Is
it over or undervalued? What could you do to the property to increase the value?
How much do you think it will appreciate over the next five years? Compare this with
the returns you are currently getting on the rest of your investments. Which is
higher? Where should you be in the long run? Write down your answers below.
7. In the space provided below, list the property or properties you currently own.
Now, write down things that you could do to “immediately” increase the value of that
property/properties. What twists could you apply that would make it/them more
valuable and more appealing to potential buyers? List at least five improvements for
each property. Good luck!
S T E P # 2 : P R E PA R AT I O N I S K E Y
I want to talk about newspapers for a little bit. Mark Twain once said that he didn’t read
a newspaper for seven years and they were the best seven years of his life. And
unfortunately, we all have this notion that if it’s in a newspaper, it must be true.
“You’ve got to be joking,” I hear someone saying.
A couple were sitting down reading things, and the wife looked up at her husband and
said, “It says here in the paper that in India a man doesn’t know his wife until after the
wedding.” And he looked up and he said, “Uh-huh, and why do they single out India?”
Newspapers have a lot of things in them that we tend to believe because they’re in the
paper. Unfortunately, the newspapers aren’t kind on real estate; they tend to run it down.
Let me give you a few examples. There is a quote: “The housing money pit is a poor
place to sink our savings.” “Home ownership no longer a gold mine.” “Countries all
around the world are finding that fewer people are investing in real estate as a place to
live.” By the way, is that good or bad?
It’s great, because where are they going to live? They are going to rent houses from?
Us. So that’s good.
Look at this one here, “Valuer sees danger of property slump.” A leading appraiser
predicted that history may repeat itself and the present property boom turn to a bust. Do
you think this is a problem?
It’s not really, because it was written in March of 1985, and I challenge any of you to
know whether there was a mini-boom or a mini-bust at that stage. Who cares? Because
as we saw this morning, things tend to go up in fits and starts and down a bit, plateaus,
drop a bit, but in general they tend to go up. And as long as you hold property for the
long haul - and by that I mean more than six months - you’ll do all right.
While we’re talking on that topic, I never proposed that you should be a speculator in
property, or a trader, or even a developer, because in my experiences developers can
do very well and they make a lot of money and then they do a slightly bigger
development and they do very well, and then they have to do a slightly bigger one and a
bigger one, and what happens then? All right, it falls over. Something goes awfully
wrong, maybe something unexpected, but all their energy, all their resources, all their
equity is tied up in the next development.
Whereas, when you’re an investor, every time you buy one, you add that to your pool.
When you have one property and one tenant, do you have a serious problem if you lose
that one tenant? Initially you do, right? You’ve lost all of your income. When you have 20
tenants and you lose one of them, do you have a problem? No, it’s only 5 percent of
your income.
All right. So, “Valuer sees danger of property slump” doesn’t really matter. I’ve got a few
others here, which I’ll flick up on the overhead projector. Look at this one here. “House
prices may fall 27 percent in the next 20 years.”
Now, is that enough to put the fear in you or not?
This is around 1992.
Here’s one, an article written by a professor of real estate studies, “Time to exercise
caution in small property investment. Lately, I’ve become increasingly concerned about
the growing euphoria that surrounds small property investments.”
These are people who are telling you what to do. It’s in the papers. Papers love the stuff.
They’ll print it all the time.
How about this one here? “Shift from owning a home, a global trend.” “The trend away
from housing as an investment is an international phenomenon.”
Again, is that good or bad? It is fantastic, because more people are renting, fewer own
their own homes, and therefore more people are going to be renting from us. I love it.
And this is my all-time favorite article that ever appeared in a newspaper on property.
You can see it was on the 6th or 7th of October, 1992. And here it is, “Selling up seen
as top option. People owning houses as investments will be better off financially, in 20
years, if they sell them now and put the proceeds in the bank,” according to the
Infometrics Forecasting Group. The group forecast yesterday that house prices would
fall about 20 percent relative to the consumer index prices over the next two decades. If
consumer prices go up by an average of 1 percent a year for those 20 years, for
example, the forecast implies that house prices would hardly change at all from what
they are now.
By contrast, selling up and putting $100,000 in the bank, this is the net equity or the
average equity that people have from a $200,000 home, 50 percent gearing. By putting
it in the bank, they could expect to earn something over 1 percent, about 6 percent at
present on a two-year deposit. Even if interest rates average only 4 percent, that
$100,000 would be worth $219,000 at the end of 20 years, more than twice as much as
the value of the home.
Now remember, I said before, when you read something like that, you’ve got to figure
out what is the counter argument? What’s the fallacy in this? Remember, they’re saying
sell up; put your net equity of $100,000 in the bank over 20 years. Even at 4 percent it
will grow to $219,000, whereas your house may not have gone up by much.What’s the
fallacy?
You’ve got to pay rent.That’s right. If you sell your home, where are you going to live?
Because, on average, a $200,000 home rents for about $300 a week or $1,200 a
month.That’s $15,000 a year, and over 20 years that amounts to $300,000, assuming
rents won’t have gone up at all in that 20-year period.
And yet, they’re saying you should sell it and put it in the bank. So the fallacy is, ladies
and gentlemen, if you sell your house because you think you’ll get a better return,
where are you going to live? You have to live somewhere. And, of course, three months
later Infometrics came out and said, “Well, now conditions have changed. It is now
good to be investing in real estate again,” but in the meantime the aftermath of this has
its effect.
I was sitting in a taxi once, going to the airport, and I had some boxes in the back of the
car, and the driver said, “What’s in the boxes?” And I said, “Well, they’re books.” He said,
“Really, what on?” I said, “Well, they’re on real estate.” He said, “Oh, you know a bit
about that do you?” I said, “Not really.” He said, “Tell me, I read this report about having
to sell your house, so I did. Do you think I did the right thing?”
You know, if it’s in the paper, it must be true. So, it’s a very dangerous thing. Just
because you see it in black and white, it doesn’t mean that it’s going to be true in
general, and more specifically, it doesn’t mean that it’s going to be true for you.
The next handout I would like, please, is the one where we talk about the cyclical nature
of the economy. It’s often spoken of as the economic clock, and I just want to highlight
that there are things that happen in our economy which are repetitive in their nature,
and a lot of pundits who get space in newspapers will tell you that that’s your guide to
buy or to sell.
By that, I simply mean that they all seem to follow each other like lemmings. They all
seem to suggest that when interest rates are low, you should be buying. When they’re
high, you should be selling. And it ain’t necessarily so. Maybe there’s a better way of
going about this?
I’m sure many of you will have come across such a clock before. It’s a standard cycle of
boom, downturn, bust, and upturn. I’m sure you’ve seen it.
Let’s start at the top of this economic clock. We’ve got the share mar ket at a peak. We
all know what that is. Everyone is feeling good.They’ve got lots of liquidity, lots of cash.
We then go down to increasing property values. Why might that be? Well, people think
that they’ve got a lot of money. Their shares have gone up, so they start to invest more
in property.
Then we’ve got increasing interest rates. Why would interest rates increase? Well, a lot
of governments around the world try to manipulate the economy by varying the interest
rate. They think, “Oh, this economy is growing too fast; let’s increase the interest rates
and that will put a cap on it.” It sure does.
Then we go to decreasing share prices. Some people still borrow money to buy shares.
By the way, when I say you can borrow money to buy property, some say, “Oh, you can
borrow money to buy shares, too. I know. Sony has borrowed lots of money to buy
shares.” And I say, “Uh-huh.” Think about what you just said.
Have you ever heard of anyone going to a bank and saying, “Here are my share
certificates. Will you lend me some money with these share certificates as security, so
that I can buy property?” No. But all over the world you’ll find people who go to a bank
and say, “Here is a property. Can I borrow against this to buy shares?” All right, that’s
the standard thing.
So, we’ve got decreasing share prices, then you’ve got decreasing commodity prices,
decreasing overseas reserves - the economy seems to be in trouble now - stagnating
rents. We go to harder to obtain finance, then stagnating and decreasing property
values. We’re in a bust phase. This is when everyone says, “You should sell; properties
aren’t going anywhere,” and all those books come out like we’ve had recently; properties
are going to go down by 40 percent and never recover, the coming property crash, all
that sort of thing.
Now, is that a good time to be buying? You bet it is. It’s the best time to be buying. When
there’s doom and gloom, and more particularly, when there’s financial blood in the
streets, that’s the best time of all to be out there buying. All you need is a bit of
confidence, because if you can overcome that fear that things are never going to
recover, then you’ll do very well.
Anyway, at that stage, because the economy is really depressed, governments think,
“Oh, we better do something.” They drop the interest rate. Decreasing interest rate, then
you get increased unemployment, increasing share prices. We’re in the upturn phase
now, increasing commodity prices, increasing overseas reserves, increasing rents,
easier to obtain finance, the banks are throwing money at you, just about, and then we
get another share market peak.
And in that process we’ve just gone around in one big loop. And this process happens
repetitively. Now, some parts of the cycle aren’t always in sync with the others. Some
have different cycle times, if you like. But in general you can get a pretty good idea of
where an economy is at.
I’d like the next handout, please, because that’s going to show how you can be counter-
cyclical and the merits of being counter-cyclical. Because everyone always tends to do
things at the same time, and that is so wrong. And you know, a lot of people don’t ever
get into stocks, but then when they hear that everyone is doing so well, they all jump in.
And there’s that old saying that when the brother of your milkman is into buying shares,
you should get out.
I was closely involved with the Dallas market, because through a company I was
involved with, we had a crack at what’s known as the Republic Tower. The Republic
Tower was the largest building west of New York when it went up. It was 58 stories high.
It had something like 2 million square feet of space. The original cost to build was $300
million U.S. Its then replacement value - this was four or five years ago - was $400
million U.S., and we had a contract on it for $15 million.
Now you might say, “Why is it possible that something with a $400 million replacement
cost would even consider a contract of $15 million?” Well, it was only 6 percent
occupied, and the operating expenses exceeded the rental income from that 6 percent
to the tune of $1.9 million a year. In other words, if you acquired this building you took
on board a liability.
But we had other plans. We were negotiating with a hotel group to turn 30 stories into
an up-market hotel, and that would have resulted in about $20 million a year in rental.
And based on a cap rate of 10 percent that would have given a value of about $200
million, so there were things we had in mind.
And, by the way, these opportunities that you get for $160,000, like the funeral parlor, or
$59,000, like this wet fish supply shop; or $500 for an old home, they exist on any size.
The only difference between the small deals and the really big deals are that when it
comes to really big deals, you’ve got much less competition. There are few people
looking at that level. There are few people that are going to afford to play at that level.
Conversely, you can do many $500 deals, but you can’t do many $300 million deals.
We didn’t succeed in acquiring that because our price, perhaps, was too sharp; we had
trouble getting funding for it. We’d go to people who typically fund real estate deals, and
they would say things like, “This is just too good to be true. There’s got to be something
wrong.” And you can laugh now, because you’ll hear, shortly, the outcome.
But I was back there a couple of months ago, and it was sold for $25 million, and it’s
currently undergoing a $70 million refurb and facelift, and someone, for less than $100
million, will have something worth $400 million. So if we had only found someone with,
perhaps, $25 million to play with, they could have done very well. But believe me; even
when you can suggest returns like that and make them a part of the deal, it’s still very
tough.
So, that’s one thing I want to point out, that you’ve got to go against that trend. No one
believed in the Dallas market because it was suppressed, and they had all the “yes,
buts” answers. You know when people say, “yes, but,” you know there’s something
wrong. It’s a very cheap building, only $15 million or, say, $25 million to buy. Yes, but the
market is suppressed. That is true, but it will go up possibly when the economy
improves. Yes, but it hasn’t gone up for the last 13 years. That may well be true, but if
you look at the trends throughout the nation, these things also go in cycles and there
was this massive oversupply of building that’s slowly being taken up. So surely, it’s
possible that this building will once again be occupied. Yes, but it’s getting older by the
year. Well, surely we could do a refurbishment? Yes, but that will cost a lot of money.
And if you get into that mode of “yes, but,” you will find reasons why you shouldn’t buy
something. And that is why, ladies and gentlemen, you shouldn’t listen too much to
other people. You have to go out there and make your own decisions. And we say it on
the first page. That includes me by the way. You shouldn’t just do something because I
say it. You should challenge everything I say. Who knows whether what I say is right for
you? Who knows whether it’s right for me? But at least if I do something that I suggest
and make a mistake, it’s my own doing. I don’t want you to make a mistake on my
account. Make your own mistakes.
Do you see where I’m coming from? On the first page of this little book, Making Money,
listen to this, “Where can you go for help? Independent advice is often sought from
bank managers, accountants, and solicitors whose expertise in property investment may
be limited. Ask yourself this question. If you wanted to be the best cricket player, who
would you ask for advice: the promoter, who handles the money; the scorekeeper, who
does the sums and keeps the score; the umpire, who ensures that the rules are
adhered to; or a well-known player like Sir Richard Hedley, the player who has plenty of
experience?
Clearly, if you want to be a successful property investor, you don’t simply ask the advice
of the bank manager who handles the money; or the accountant, who does the sums
and keeps score; or the solicitor, who ensures that the rules are adhered to. Rather, you
should seek the advice of experienced successful property investors, the experienced
players. Bank managers, accountants, and solicitors provide expert professional
services in the areas in which they are qualified, not necessarily property investment.
And I know of many people who have come across great deals, and, full of enthusiasm,
they go to their bank managers or their accountants or their solicitors and they say,
“What do you think of this?” And at the end of half an hour, the so-called professionals
have talked their clients out of going ahead with the deal.
And I have another theory on this. I have theories for a lot of things. My theory is as
follows. You’ve bought three properties already, you’re looking at buying your fourth, and
you’ve got the fifth one lined up. You go to your bank manager full of enthusiasm. “Look
at this bargain I found now. What do you think? How about giving me another
mortgage?”
This guy, at some subconscious level is thinking to himself, “By crikey, if what this chap
is doing is correct, then I should be doing it too, and I’m not doing that, and how am I
going to admit to myself or my wife that I’m doing the wrong thing? I don’t want to admit
that.Therefore, what I’m doing is right, and therefore, what he’s doing is wrong,” and
therefore, he declines your mortgage.
Or what happens is you come along with no properties. You’ve been to one of these
courses, and you say to your bank manager, “I’m going to buy a whole swag of
properties,” and he says, “Well, good for you.” And you buy your first one and you get a
mortgage through them and that’s great, and you get your second one, and by the time
you’re onto your third one, he says, “Hum, he’s growing too fast. You know, he’s going to
fall over soon,” and he puts the brakes on you. He stops letting you get more properties.
So what do you do? Do you give up? No. You change banks. You go to another bank,
and he sees you as a three-property person, and then you buy your fourth and your fifth
through the same bank manager, and then eventually this bank manager then goes,
“Oh, this man or woman is just getting a bit too over the top,” so they put the brakes on.
And you have to go to another bank. And every three or four properties, you keep
changing banks, and I know you think you’re going to get a problem because eventually
you have to go around to the first bank. It’s not a problem, because these guys retire
and there will be a new person there. And silly as it sounds, you sometimes have to do
that.
Now, one of the things that often comes up is people say, “How should we buy our
properties? In which sort of entity should we buy them?” Well what are the options? You
can buy them in your own name, correct? What else can you do? Company name, is
that a valid option? Sure. What else? Trusts. What else is there? Mistress’ name.
Partnerships, that’s right. Okay. So there are a whole variety of ways that you can buy
property.
Now when I started off, I started off buying in my own name, because I just thought,
well, that’s the thing to do, and anyway it felt pretty good. You knew that that property
was registered in your name. It’s an ego thing, I guess. And then after a while you get
over that, because you think, “Gee, I don’t want another one in my name.” In my case,
you’d go down to the land transfer office, and you’d overhear someone say, “Oh, my
boss wants me to know what Dolf’s been buying,” you see.
Why else might you buy in a name other than your own name? Tax advantages, all
right.There’s a possibility there. Also protection, you want to protect yourself. What
from? Liability or litigation, right? You might be sued for some reason.
So, if you have 10 properties and each of them is in a separate entity, and someone
breaks their neck on the steps going up to one of your properties, and they sue the
entity that owns that property, at least then the maximum liability is the value of that
company or that entity, which is that one property, but it isolates it from the remaining
nine in your portfolio. So, that’s a valid reason. You’ve got some kind of protection,
creditor protection, liability protection.
Woman: Marriage protection.
Marriage protection, that’s an interesting one, because when we say marriage

protection, we really mean divorce protection, surely. It’s like in the English language
you go to the doctor and you say, “Have you got something for a headache?” And in any
European language, when you say, “Have you got something for a headache?” the
doctor will say, “Yeah, a hammer,” because there we say, “Have you got something
against a headache?”
So, marriage protection, that could work both ways, right? It could be the female in the
partnership trying to protect herself from the rapacious racketeering of the husband.
Yes, David.
Woman: Things like death duties.
Death duties, right. Do we have death duties in this country? [New Zealand] Well we
did, but not anymore, but they might be introduced, you see, so all these things come
into play. So, let’s explore some of the structures that you might want to use, and then
look at how you might want to do it.
The first one, as we said, is in your own name. Are there any advantages at all of
buying something in your own name?
Woman: No.
No? Well, we’re going to break that paradigm. All right. Imagine you buy a property that
is heavily negatively geared. Now, remember what negative gearing means. It means
that your rental income doesn’t cover all your outgoings. So, you’re into negative gearing
mode. And there could be valid reasons why you want to buy such a property, because
you know that it’s going to go up in value a lot, and therefore you want to buy it anyway.
So, you’ve bought this property that’s negatively geared.
Can you deduct that paper loss against other income? Yes, you can. So if you set up a
new company to own this new property that’s negatively geared, what are you going to
claim that loss against? Nothing, right? You might get a special loss attributing qualifying
company or some other fancy structure, but that has other onerous implications when
you start making a profit. So, one advantage of buying a property in your own name is
that if there are any losses, you can offset those losses against your own income.
Now each country has a different level of what you can offset. For instance, in the
United States you can only offset $25,000. In New Zealand it’s unlimited. So, there are
things you have to take into consideration. That is one big advantage of buying in your
own name.
By the way, when we’re talking about being negatively geared, there’s a difference
between being negatively geared pretax and being negatively geared after tax. For
instance, you could well be negatively geared pretax, which means you collect rent from
the tenants and you pay your outgoings, and there’s a deficit which you have to
subsidize by taking money out of your back pocket, not out of a bank account. However,
by the time you settle up with the tax man, there could be such great depreciation
breaks and other allowances that, in fact, you’re extracting net money from that
property. There’s profit from the property, right, which means that pretax you are
negatively geared, but posttax you are positively geared.
Now, the beauty of negative gearing is that you can claim those losses against other
income. So you might, in your own name, have a property that’s negatively geared
pretax, and that negatively geared loss you offset against your own personal income,
and the net effect of that is that it greatly increases the returns that you get from that
property, relative to what you would have gotten if you couldn’t have used those losses.
So, there are definite advantages of buying in your own name.
There’s never a dispute as to ownership because you always own yourself. No one ever
can take over ownership of you. They can try by assuming your identity and all that sort
of thing, but it doesn’t work, right? It’s a concept that’s ridiculous. Whereas if you have a
company, can people take over your company? Does it sometimes happen against your
will? Sure. And if you have a trust and there are trustees who control that trust, could
those trustees turn nasty against you? It’s possible, right? So, the other advantage of
buying in your own name is you have much more certainty of ownership.
But now, let’s look at our next structure. Imagine if you buy a property in the name of a
company. What could be one or two of the advantages of buying in a company name
rather than your own name?
Woman: GST.
GST implications; well, that’s true. We’re getting into the fine aspects of tax situations.
So yes, in some countries where there is value-added tax, there could be a GST or VAT
complication that is resolved by buying it in a company name. I’m thinking on simpler
terms. You’re buying it in the name of a company. Many countries have a capital gains
tax, right? So, when you buy a property in your own name, in order for you to be able to
sell it, you have to transfer the ownership out of your name. Would that be correct?
Whereas if you buy a property in the name of a company, to then transfer the ownership
of that property, would it not be adequate just to sell the company? The property hasn’t
changed hands. It’s still owned by the ABC Company. However, the shareholders of that
company have simply now changed. So, there are advantages in doing that.
In fact, when stamp duties still applied in various places – that’s just a transaction tax on
the purchase – one way that people overcame that is instead of buying or selling the
property, they would just change the ownership of the company. So again, the property
didn’t change hands, and therefore there was no stamp duty applicable. So, there are
some of the advantages of buying in a company name.
What would be some of the disadvantages of buying in a company name? Can anyone
think of any? Would there be disadvantages?
Woman: If you wanted to sell one property at a time, you’d have to have a separate
company for each property. Is that right?
That would be right. If you took this advice and had a property registered in the name of
a company, so the company owned it in order to be able to facilitate the sale, if you
wanted to get 10 properties you’d have to have 10 companies. So, each year you’d file
the annual returns for 10 companies. That could be a logistical nightmare. On the other
hand, it could be a small price to pay to have that flexibility. But you’re right, you’d have
to have a lot of companies to own a lot of properties. You might have a company owning
a cluster of properties.
But some of the disadvantages are that you’ve got overhead. You have to work at it
harder. You’ve got less distinct ownership. If the company grows big and you get other
shareholders involved, then all kinds of things can happen according to the constitution
of that company, where the ownership of that property could be challenged somehow.
So, the third option we’ve got is to have a trust, and a trust is just an entity. It’s a legal
entity that has legal status, and all it means is that some people agree to look after
some assets on behalf of the beneficiaries, and a trust is set up by what’s known as a
settlor or a grantor. There are three parties to a trust.There’s the grantor or settlor who
sets up the trust.Then there’s the trustee or trustees who manage the assets of the
trust. And finally, there are the beneficiaries. They are the people who supposedly are to
get the benefit of the assets of this trust and the income that the trust may generate.
These are simply the three aspects of a trust. So, when a property is put into a trust, all
it means is that the trustees agree to go on the registration documents as the legal
owners of this property. However, they only own it in their capacity as trustees of your
trust.
And the difficulty with a trust is that your trustees may not always execute your will.They
may not always do what you intended to do. Remember, a trust lives long after the
settlor has set it up. It has an ongoing life. In New Zealand it’s 80 years. So, it’s one way
of getting around this litigation problem, where you separate the assets out. What are
some of the other advantages of a trust? Right in the front here.
Woman: There is a trading trust, which is different to the ordinary trusts that we’ve had
in the past, and there are tax advantages to it. Can you comment on that?
Yes. A trading trust has the purpose of having the operations of a business flow through
it, and there are certain tax advantages involved in setting up a trading trust rather than
a standard family trust. However, when it comes to property, you want to be a long-term
investor, and I certainly don’t encourage people to trade in properties. There are all
kinds of downsides in doing that. So in general, I wouldn’t be too concerned with the
implications of a trading trust for property acquisitions at all.
So, these basically are the three options you have available to them. Now, it doesn’t
mean to say that there are only three ways of going about it. For instance, could you put
properties into a company, the shares of which are owned by a trust? Is that possible?
Could there conceivably be advantages in doing it that way? Of course there are. It
means that it’s once more removed from you. You still get the benefit of it. If you’re the
beneficiary of this trust, then the company owns the property, which generates income;
that income flows into the company. It might give a dividend to the trust, and then the
trustees can then distribute that income to the beneficiaries. So, there are all different
layers and ways of structuring these things.
Now, there is no one best way for your situation. It depends on where you’re at, and
where you’re headed, and what applies to you today may no longer apply in five years’
time. In five years’ time you might find yourself acquiring properties in a different entity
or doing it slightly differently. We have a question here.
Woman: If you have a company and your trustees become shareholders, just as you
described, if you go and buy a property, can you buy the property in the name of the
company or do the trustees names still have to be on the sales and purchase agreement?
Well, if I understand your question correctly, you’re saying, imagine you own a company
and you’re the shareholders of this company, and then you might sell the company to
the trust or the trust might set up the company and the trust is the shareholder of the
company.
Woman: No. The company buys the property.
Right. The company buys the property, so the company owns the property.
Woman: Yes.
Who owns the company?

Woman: Well the trustees are the shareholders. Is that right?
Well, no, I’m just saying one possible scenario is that you could have a company that’s
owned by a trust.
Woman: That’s right.
Which means the trust owns the company.
Woman: That’s right. So, then when you go and buy the property, do the trustees’ names
have to be on the sales and purchase agreement?
No.
Woman: Or just the company’s name?
Neither. You could have a friend down the road sign Fred Montgomery, as nominee.
That’s on the contract to buy it.
Woman: Oh, okay.
You can do that with any property. You can sign yourself as nominee and decide later on
which entity to put it into. In fact, I always put “as nominee” on every contract I sign, and
sometimes when I don’t want to let on that I’m the one behind it, I end up putting a
friend’s name on it because they can sign as nominee, as well. Okay. So, if your
question is, What happens if the trust wants to buy the property, can they buy it
themselves, even though they already own the company? Yes, they can.The trust can
own the company and the property, or the company can buy the property, in which case
the company owns the property and the trust owns the company.
Whose name appears on the title? Well, once it’s settled, the name of the trustees will
appear on the title, but they will own it in their capacity as trustees for the trust. That’s
when the trust owns it. If the company buys the property, even though the company is
owned by the trust, then the name on the title will be the company. That is the owner of
the properties. Okay?
You’ve got to figure out which one of these options works best for you, and the point I
was making is this, this varies with time, and the best thing to do is to seek the advice
of someone who is really competent. That may, but not necessarily be, your own
accountant at the moment. You might have to read a book on trusts or go to a special
outfit in town that deals with structures, or you might just have to find out as much as
you can and make your own decisions. But ultimately, you have to decide what kind of
an ownership structure you want, and maybe you want a mixture; then you cover all
your bets.
Because it’s part of this process we go through of deciding what is the best for you, and
the most difficult thing when it comes to properties is deciding is this a good deal or is it
not a good deal. You heard Marguerite talk about some of her spectacular deals, and
the easy thing to do is to look back with the benefit of hindsight and say, “Well, that
sounded like a good deal,” and the $500 deal was a good deal, and my wet fish supply
shop’s a good deal, and the 221/2 thousand-dollar house is a good deal, but if you’re
faced tomorrow or the next day with five properties that could be good deals, how do
you decide which one to acquire? And that’s what we’re getting on to next.
EXERCISES
1. “If it’s in the newspaper, it must be true.” How many times have you heard
someone say that? This kind of thinking can be very dangerous, especially when
real estate is involved. You have to look at something carefully and ask yourself: Is
that too good to be true? Is that sound advice or is it not very well thought out? How
does that affect my own personal situation? In the space below, write down some
properties that caught your eye in the newspaper. Did you follow up on any of them?
Did you purchase any? Did they turn out to be good or bad? In hindsight, would you
do it again? Be totally honest with your answers.
2. As Dolf points out in this session, the economy tends to be cyclical in nature, and
most people tend to make investments at the same time according to what’s
happening in the economy. This can be a very dangerous pattern. You need to
develop a counter-cyclical approach to making your investments. In the space below,
consider some ways you could go against the trend the next time you are ready to
make an investment. What could you do differently that might end up making you a
lot of money? How have you invested in the past? How did those investments turn
out? Consider what’s happening in the economy right now. How can you use this
information to your advantage?
3. In the space below, write down all the people that you seek advice from when
making a decision on a property. Who are they? Friends, professionals, other
investors, etc.? Has their advice turned out to be good or bad? Which ones would
you go back to in the future? Can you think of other people whom you might want to
consult with next time? Consider your answers carefully before you go to make
another investment. Remember, you have to do what’s right for you.
4. What are the advantages to buying property in your own name? What are the
disadvantages? Have you purchased property in your own name before? How did
that transaction(s) work out? Would you do it again? Write down your answers
below.
5. What are the advantages to buying property in the name of a company? What are
the disadvantages? Have you purchased property in the name of a company
before? How did that transaction(s) work out? Would you do it again? Write down
your answers below.
6. What are the advantages to buying property in the name of a trust? What are the
disadvantages? Have you purchased property in the name of a trust before? How
did that transaction(s) work out? Would you do it again? Write down your answers
below.
7. Now that you’ve answered Questions 4, 5, and 6, make a list of all the options
available to you the next time you go to purchase a property. What kind of entity
might you buy it in this time? How will that be better for you in the long run? Are
there any dangers or risks that could come into play? Please consider this
information carefully when writing up your next contract. Good luck!
STEP #3: PLANNING PREVENTS

IMPULSE-PURCHASING
Remember we said before, never fall in love with a property; fall in love with the deal.
The software strips away all those things that make you emotionally attached to a
property. You can only look at the numbers.
Now, imagine you have a property, and you might think it’s got a great view or it’s got
this feature that I really like. But you do an analysis of that property by putting in the
numbers that you’ve been playing with for the last half-hour, and then you can show
someone else only the numbers on that property. You can’t show them photos or
describe the view, or anything else. Would you agree that you strip it of all those
emotional things; you just look at the raw data? Give us the numbers.
When it comes to investing, there are two things that you absolutely must know about,
and it seems so silly and easy that you almost think it’s facile, but the first thing is you’ve
got to look at the words, and by words we mean what is it about this property that is
important? When it comes to our real estate, the words we use are collateral and equity,
value, purchase price. And the only other thing that comes into play, apart from the
words are the numbers.
You’ve got to look at the words and the numbers. If you do not know the words, if you
don’t know the meaning of equity, or if you don’t know the difference between equity
and collateral - and some of you may well be in that position - then I suggest to you that
is something you have to find out about smartly, because without understanding the
words, you’ll never fully understand a property.
And similarly, you’ve got to know the numbers. If you know the numbers, if you know
what the internal rate of return is, if you know what your pretax cash flow is, your after-
tax cash flow, the extent to which you’re negatively geared pretax, the amount of your
tax rebate. Have you all got a feeling for what I’m talking about, having seen it on the
screen and on the computers?
If you get to know those things, you can look at a property and say, “Well I like the
sound of that,” or “I like the feel of that,” depending on whether you’re essentially
auditory or kinesthetic, or you might say, “I like the way it looks.” Then you’re a visual
person, right?
Then you can do the numbers and say, “Hey, based on the numbers, this is a good,” or
“Based on the numbers, it’s not such a good deal.” And you can strip away all that
emotion that normally goes into a property, which is why people make bad decisions.
Now is it possible that you look at the words, and you look at the numbers, and you
make a rational decision to say, “This is a good deal.” And three years down the track it
turns out to have been a rotten deal?
That’s always possible. But it happens less often in real estate than in other
investments. Let me give you a reason for that. If you look at a graph of the stock
market, over a period of time, and it doesn’t matter which period of time you take, but
you will find that the graph is something like this. It’s up and down, right? It’s very
violent. And more particularly, this is the average of the stock market as measured by
the Dow Jones, but if you look at any one stock or share, then it might have gyrated
even more violently than that, and it might have gone off the track.
There are huge variations in stock prices. You can check that by just looking in the
paper and seeing how some of these shares have varied in price, even in the last 12
months. A high of $17.00, a low of $4.30. Huge differences.
A mathematical way of saying this is that the standard deviation is very high. On the
other hand, when you look at property, you will find that it varies, but the variation is
much more gentle, and this is the market in general; the variations are far smoother. The
standard deviation is a lot less.
And interestingly, if you look at any one property relative to the property index, it will
tend to track that pretty well. So, there’s a big difference. In other words, if you take any
property, at random, in this country, how will it have gone up in value relative to the
market average of all properties? And the answer is pretty much the same. But if you
take any one share or stock, and you say, “How has it fared relative to the market as an
average?” Well it’s anyone’s guess.
So to that extent, there’s far more stability with property than you get with stocks and
shares and mutual funds and other things, and that for me is one of the great
advantages. So, getting back to our words and numbers, when you understand the
numbers, part of understanding the numbers is understanding that there’s much less
variation.
You can be pretty sure that if, in a 30-year period, properties have gone up by an
average of 128 percent, then your one property will probably have done roughly that
as well.
Now, are there regions in every country where the growth is higher than average? Of
course. Does that mean that there are other regions where the growth is lower than
average? Of course. That’s why you can say that in this countr y, half the population’s of
below-average intelligence.
And some of you don’t get it yet; I can tell.
And it simply means the other half is above average. Because average means the
middle. So, half are above and half are below.
It’s got to be, by definition.There’s nothing magic about it.
The same goes with properties. Some parts of the country go up a bit higher than
average; therefore, some by definition have to go down a bit faster than average. So, do
you think you would have to be super smart to figure out which regions go up in value a
bit faster?
Of course not. Anyone could work that out. You can look at the stats. Someone asked
me before, “Where do we get those stats from?” Well, you can get them from your local
real estate institute or probably from your local realtors or real estate agents. You can
get it from publications like The Property Investor or The Real Estate Journal. They all
have figures on what’s happening around the country with property values.
And all you have to do is figure out what has happened in this region? Do I want to buy
in this region? Strip the emotion of it; what’s the track record?
Let me give you an example of that using something other than property. Let’s talk
about two companies which are on the share market or stock market, Company A and
Company B. They both sell for $1, and you buy one share of Company A for $1 and
another share of Company B for $1. And you find that after a period of time the share
prices have changed. Share A has gone up to $2 and share B has gone down to 50¢.
Now, quickly, you have to sell to raise some cash. What share do you sell, the $2 or the
50¢ one?
Woman: The 50¢ one.
The 50¢ one. Who else? The $2 one, which one would you sell? Hands up, those who’d
sell the $2 share. All right, that’s fair enough, and hands up, those who’d sell the 50¢
share. All right, that’s very good. About one quarter of you have voted.
Now, let me ask you this question. You all know what love is. What’s the opposite of
love?
Woman: It’s indifference.
Indifference. Who simply doesn’t know which one to sell because you’re scared to raise
your hand, because if it’s wrong you’ll feel really bad?
Here’s my theory. You can have your own theory and do your own thing anyway, but my
theory is as follows. The reason why share B went from $1 down to 50¢ is probably a
combination of a whole series of factors, including the fact that that company is run by a
set of directors, who, perhaps, don’t really know what they’re doing.They may be in a
sunset industry, by which I mean they make things like telex machines, typewriters, and
slide rules.
Who wants them? Chances are that given they’ve gone from $1 down to 50¢, they’re
going to continue going down. However, Company A, that went from one dollar to $2.00,
it’s gone up in value, probably through a weird combination of things like the fact that
the directors are switched on, know what they’re doing, and they’re going in the right
direction.
They’re in a sunrise industry. They’re doing things that people want more and more of,
maybe something like cell phones or something to do with computers. And chances are,
over the next six months or 12 months, they’re going to continue doing well. History
gives us a unique insight into how things are doing.
Now can companies change around? Sure. Can people change? Sure. You’re here to
effect change on yourself. But in general, when you look at your friends, and you’ve had
one buddy who’s been simmering along for the last 10 years, going from one mediocre
job to another, and he never has any money, and he’s always hitting you up, “Hey, can
you lend me 40 bucks?” Chances are that’s going to continue.
I once needed to borrow some money; I went up to a friend and said, “Hey, will you lend
me $50?” He said, “$40? What do you want $30 for?” So, it’s a natural disinclination we
have to lend money to people, right?
Things tend to go in patterns. Companies that do well tend to do well in the long run.
Companies that don’t do well tend not to do well in the long run. Regions that tend to
grow tend to grow in the long run. Regions that are in decline tend to be in decline in
the long run. So, if you look at the stats in any region of the world, you’ve got a pretty
good handle on whether that particular region is going to do better or worse than
average in that countr y.
We can talk about the United States. If you know that in San Francisco last year the
average growth was 11.8 percent, and that that was the highest annualized growth rate
of any city in the United States for that year, would you assume that there’s a good
chance that this year it would still have pretty good growth?
Woman: Yes.
And a city that’s had lousy growth, like zero or minus one or maybe just 2 percent, that
it’s probably not going to suddenly turn around and do spectacularly well. So, you can
use this momentum, and that’s what I mean by the numbers. You’ve got to get used to
the numbers, and you’ve got to strip all emotion away from it. Because, believe me, if
you love Tasmania and I’m picking on an Australian island - by the way, who’s ever been
to Tasmania? Just a few of you - is it a beautiful place or an ugly place?
It’s pretty, isn’t it? It’s very, very beautiful. In fact I went up to the mountain - I think it’s
called Mt. Wellington - overlooking Hobart, and the views from there would have to be
one of the most stunning views I’ve ever come across, and I can tell you this: if Hobart
were at the latitude of the Gold Coast, no one would want to live on the Gold Coast.
You’ve got the mountains and the scenery and the views; it’s stunning, but no one’s
living there. The population’s in decline.
They had five major industries in Tasmania; three of them have closed down. One of
them was making wheels for most of the Asian cars, closed down. Big chocolate factory,
closed down. People are leaving in droves. Can you get high yields on rental properties
there? Very high. Would your yield go to zero when your tenants join the rest of the
island and they leave? Sure. So you have to look at it in the cold light of day. Get the
emotion out of it. Even though it’s pretty, you’ve got to say, “I don’t want to invest here.”
You may want to live there, but certainly don’t invest there, unless there are extenuating
circumstances.
So, you’d go to those parts of Australia, if we’re talking about Australia, where there is
higher growth. We’ve already said that the southeastern pocket of Queensland has
twice the growth of the state average. That means that pocket is growing at four times
the rate of the national average, at the expense of other regions.
That is where you would want to focus. Take the emotion out of it. And don’t buy in a
particular area because you think, “Well, it’s nice,” or “My friends will think it’s good if I
can tell them that I live here or that I have an investment property there.”
A lot of my friends want to buy buildings that look really fancy, glass towers and
structures, so that they can say, “I own that.” And I’ve got to tell you, some of my best-
performing properties look like dogs, if you know what I mean; they’re just ugly, but it
doesn’t matter, because the numbers work. The numbers are great.The numbers are
beautiful.
There are a couple of other things that we sort of glossed over earlier today that I want
to come back to. I made a claim that banks are falling over themselves to give you
money to buy property, and a lot of people always doubt this and say, “Aw, come on,
they’re not that keen on it. In fact, I’ve often been to the bank and they’ve turned me
down.”
So, just for my personal satisfaction, give me a show of hands. How many think banks
are really falling over themselves to give you money to buy property? Thank you. And
how many think, “No, that’s not true. They’re pretty tough on the game?” All right. Thank
you.That said to me, it seems to be about 50/50 with perhaps a slight bias toward
thinking they are willing to.
The point I’m making is this: Imagine going to your bank manager and saying, “Mr. Bank
Manager, I really think diamonds are going to go through the roof before long, and my
neighbors think antiques are a great investment, and gold has got to be good. Have you
seen the price of gold? It’s been so low for so long, it’s got to turn around. And what’s
more, all those other things we have spoke of before, treasury bonds, CDs, stocks, you
name it, they’ve got go up. Will you lend me some money to buy these things?” They will
say no, whereas all over the world banks are giving you incentives to buy properties.
Look at this one here. This is with the BNZ. “Arrange a mortgage this week; win $10,000
next week.” Have you ever seen that in any context other than loans to buy property? It
doesn’t happen. You see them “Take out a mortgage with us this week and be in the
drawing to win a trip to Hawaii or a trip to Europe.” They want you to take out
mortgages.
Look at this one here, “Now, buying or refinancing a home with Countrywide Home
Loans makes earning miles easier.” You get frequent flier miles if you take out a
mortgage. People want you to do it. They’re not the only ones. Here’s one with United.
“How many square feet and how many miles? Earn 30,000 miles or more right from
home,” if you take out a mortgage with this bank.
They go further. This is an advertisement pitched at small-business people. “To cut

business costs, stop paying the rent.” “If you’re running a small to mid-sized business,
talk to us today, not tomorrow; talk to us today about owning your own building. Chances
are it may work out cheaper than the lease you have now.” And “A mortgage from BNZ
Finance normally means no complications with your other banking arrangements.” What
do you think that might mean?
It means that in the past, in order for them to condescend to giving you a mortgage,
they forced you to shift all your bank accounts to their bank, and now they’re saying
there will be no complications with your other banking arrangements. In other words,
“We’ll give you the mortgage and you can leave your accounts with those other banks.
We’re happy just to get the business of supplying you with that money.”
Do you get the picture that banks are falling over themselves to give you money?
They’ve got mobile mortgage managers. I’ve got articles galore about that sort of thing.
You want to take out a mortgage? We will come to see you, seven days a week, any
time of the day or night. Give us a call on this toll-free number. And they’re mobile
managers, so it gets connected to their cell phones. Who pays for that connection? The
bank does. They are hustling for your business. And well they might be, because there’s
a lot of competition from other mortgage originators, other institutions who will provide
mortgages in competition with the banks.
And then you’ve got the mortgage brokers. And they’re willing to offer finance to you.
Now what do they charge, by the way, the brokers? Absolutely nothing. How do they get
paid? Well, the institution or the banks pay them the fee. Is there any reason why you
should not go to a mortgage broker to see what they can offer? No, of course not.
Can you start to see why you should perhaps make several copies of your mortgage
application so that you can go to the bank and say, “Here’s a copy. I’ve got several
copies with the other banks. Let me know what you can offer.”
Can you have an auction? “I have here a property. It’s got a registered valuation of
$280,000. Which of you banks will give me a mortgage on that? Absolutely great,
$100,000, any advance on $100,000?” It’s almost happening. You’ve heard of
Priceline.com, where you can get just about anything you want, an airline ticket from
London to New York or whatever. You just type it in and what you’re willing to pay, and if
an airline’s willing to supply that ticket at that fare, you’ve got the deal.
It won’t be long before you can get mortgages that way. You should check the Internet
for mortgage sites. Three years ago there were 400 sites where you could get
mortgages on the Internet. One year ago it was 4,200 sites. We’re up 6,800, as of today.
These are sites where you can go to check out a mortgage. If you want to check one
out — and one that comes to mind straightaway is Ditech, www.ditech.com — and just
see what sort of things they offer.
The Internet’s international. I don’t know if they offer them in specific countries. But,
you’ll get a feel for what’s being offered. And it’s a burgeoning area; it’s going to grow.
One of the most interesting seminars I went to was one by Tom Peters. He’s the one
who wrote that book In Search of Excellence, and that’s the book that sold more copies
than any other business book ever. And Tom Peters got up on the stage - this is only in
November of last year - and he said, “Ladies and gentlemen, you all know that this book
is the all-time best-selling business book, and I want to thank you all for contributing to
making it such a best seller. But I’m here to tell you today that everything in that book is
wrong.” He said, “It wasn’t wrong when we wrote it, but it’s wrong today, and it’s wrong
for one reason only, and that reason is the Internet; the Internet has changed the rules.”
Tom Peters said, “If your business is not based on the Internet” - and by being based he
said, “I don’t just mean it’s got an Internet component, but it’s based on the Internet. If
it’s not based on the Internet, then in 10 years’ time it won’t be in business,” and he
proceeded to use the remaining seven hours of his seminar to convince all of us that
that is exactly what’s going to happen.
Now, think of it for a moment. Think of the effect of the Internet on the real estate
industry. Do you think it’s had an impact? Well, how about looking for properties. Before
we had the Internet, if you wanted to look for a property in a different city, you would
have to fly there and then see a number of agents, and say, “What have you got
available?” And start driving around.
You’d be lucky to look at 20 properties in a day; would that be a fair comment? Is it not
true that nowadays you can jump onto the Internet, and through a whole series of sites,
you can look at properties in that region where you’re going to go. You can say, “I’m
interested in properties between $300,000 and $500,000. I want a minimum of three
bedrooms, swimming pool would be good, but not necessary, but it must be a two-story
house.” You can specify all these criteria.
And it will come up with the details on them, and photographs, and location maps. The
Internet is changing everything. Nowadays when you click on a property to buy it, you
electronically get sent an offer for mortgage finance, because a lot of these properties
have been pre-approved up to a certain level. So you say, “Yes, I’d like to buy this,” and
you qualify for a certain mortgage.
Now, Bill Gates is talking about putting properties on the Internet. And guess what he
wants to charge to list a property? Because you know that to list a property through
standard real estate firms costs a bit of money, right? He is thinking of charging 15¢.
And then of course there has to be some benefit for him in having these listed. So,
they’re talking about a commission on the sale of a property. Guess what the
commission might be? Fifty dollars. That’s it. Now, do you think it could it be worth their
while to do it that way?
The answer, you’re all saying, is yes. Why?
It’s the volume. If you have enough people listing at 15¢, you can make a lot of money. If
you have enough properties transacting at $50 you can make a whole swag more.
Do you think that if they get more and more properties being listed on this site, that
more and more people might go there to look for them? It’s a natural thing.
So, you’re going to get offered a mortgage electronically. Do you know that you can
already get an appraisal done, and they just load all of this data into computers and
they know how big the houses are, and they heuristically figure out all kinds of things to
determine what the value is. You can now get a valuation of any property in the states
for $25 over the Internet. It’s changing the way we do business.
There’s been a merger recently between Century 21, Avis Rent a Car, and one of the
hotel chains. And initially you might say, “Well that’s an oddball combination of people to
merge.” Well, let me give you a local example. We had a railway company that wasn’t
exactly doing very well and a communications company called CLIA that also wasn’t
doing that well, and they had a merger of sorts. And you might say, “Well why would a
communications company and an 18th- or 19th-century transport company have any
synergy? What’s the deal?”
And the answer, of course, is that railway companies own a strip of land two or three
meters wide, going right up and down the country. And all they needed to do was to
have a little jig that dug a trench and dropped down fiber optic cables. And suddenly you
had an instant network throughout the country, and it was a very symbiotic relationship
between these two companies.
Well the same is true, surely, of Avis, Century 21, and the hotel chain. Because imagine
it; you want to relocate to a new city. So, instead of organizing separate things with all
these different parties - your travel separately, your rental car separately, your
accommodations separately, and then you go to a real estate firm - they have it all
organized. You fly into the city; your rental car is waiting on you. You go and stay at the
hotel; that’s all been organized. And then Century 21, in this case, they go out and show
you all the properties that you have preselected on the Internet. It’s happening.
I believe that the number of real estate agents throughout the Western world is going to
be decimated over the next five years. There will be no need for them. There’s already a
high attrition rate. In this country it’s 48 percent per annum and sooner, rather than later,
the total number of agents is going to decline, because we won’t need them.
I can now sit in San Diego and look at properties all over the world - London, Dallas,
Brisbane, Auckland - just by going onto the Internet. And if you don’t believe that
properties are being transacted that way, you’ve got something else coming your way.
People are buying groceries over the Internet.Think about it for a moment. You might
say, “Part of the weekly routine is to go to the supermarket.” But not everyone enjoys
that. So, there are programs for you to go shopping. You click what you want. Next week
it’s got a list of what you bought last week, because most people tend to be repeat
buyers of certain categories of products.
And think about it from the company’s point of view; compare a conventional
supermarket with an Internet grocery company. The cost to both of buying a product, a
can of beans or a bottle of whatever, is the same. The cost of doing the accounting for
the business is about the same. The cost of leasing the building to have all the goods is
the same. But the differences start when you consider the electricity to run the lighting.
Because in the supermarket they have to be well lit, but in the warehouse you don’t
need any lighting at all. In fact, they have robots, which pick out the goods you order,
and it can be done in pitch darkness.
And think of the staff costs. In the supermar ket you’ve got checkout staff, and packing
staff, and people to stock the shelves, and people to sweep, and people to clean. And in
this Internet company you have none of that cost. The net effect is that the gross profit
margin for the Internet shopping company is more than three times that of the
supermarket. And they can deliver it to your home free of charge.
They’re starting to hook refrigerators up to the Internet. You might say, “Well that’s
getting a bit ridiculous.” But think about it. Your milk bottle is empty and the fridge sends
a signal over the Internet to your Internet shopping company to deliver a new bottle of
milk.
Sound ridiculous? They can’t yet deliver the milk over the line, but things are changing.
The more you think about it, the more it makes sense. So in this context - and this is
why I bring all of this up - do you think it’s going to be harder or easier to find a property
with a twist?
Woman: Easier.
I would have thought it would be harder, because you can find a property with a twist
because there’s a disparity somewhere. Someone doesn’t know what that property’s
worth, but if you put it on the Internet, everyone can check it out. Someone might be
sitting in Helsinki, and they can see that your property down the road is being offered at
one-third of the price of comparable properties in that suburb. I think it’s going to get
harder, but that’s a personal thing; time will tell. So, the fight is on to continue finding
properties with a twist.
EXERCISES
1. “Never fall in love with a property. Fall in love with the deal.” How many times have
you looked at a property and thought, “I’ve just got to have this,” before you even
looked at the specifications and the costs involved? Did you buy the property? Has
that gotten you into trouble? What was it that hooked you on the property so
quickly? Knowing what you now know, what would you do differently? Write down
your answers below.
2. In this session, Dolf gave you some “words” he considers to be key to any real
estate deal. In the space provided below, make a list of those words and any others
you feel are also important to the deal. Then, take those words and prioritize them
to fit your own personal needs. Which is the most important and so on? This will
help to establish some ground rules for you each time you go into a new deal.
3. In this session, Dolf gave you some “numbers” he considers to be key to any real
estate deal. In the space provided below, make a list of those numbers and any
others you feel are also important to the deal. Then, take those numbers and
prioritize them to fit your own personal needs. Which is the most important and so
on? This will also help to establish some ground rules for you each time you go into
a new deal.
4. What is the one major element to finding properties in high-growth areas? Write
down your answer. Have you been able to successfully track high-growth areas to
invest in? If yes, what did you do that worked? If no, what should you be doing
differently the next time you go to invest? Write down these answers, too.
5. How easy was it for you to get a mortgage on your last investment? Did you go
through a bank, lending institution or mortgage broker? How tight was the
competition to get your loan? How was the overall experience? Would you work with
this institution again? Write down your answers to these questions and any other
information pertinent to your loan, in the space below. Consider this information
carefully before you go to get financing again. Good luck!
6. Have you ever used the Internet to shop for a mortgage? If yes, what was
available online and how did it compare with traditional mortgage outlets? If no,
what kept you from using this resource? Are you uncomfortable with online
services? Do you think you might shop for a mortgage online when you’re doing
your next deal? Write this down, below. Mortgage shopping on the Internet is here
to stay. Use it!
7. Have you ever used the Internet to shop for a property? How many times have
you done this? How many properties have you viewed online that you actually went
out and looked at? How beneficial was the information you received online? Was it
accurate? Write down your answers and consider how you might use this tool
differently the next time you go property hunting.
STEP #4: PRO-ACT IVITY REAP S PROFITS
I want to start off today by talking about something that I know a lot of you have come
here to hear about - the relative merits of commercial property as opposed to residential
- and the first thing I want to do is brainstorm some of the differences. The first thing I’ll
say is this, whether an economy is going really well or really badly, whether prices of
property in general are high or low, everyone has to live somewhere. So, you’ll notice
when the economy goes way down, people still live in homes.
They might not be able to afford to buy them as readily. Some people with mortgages
on existing homes may have to sell their homes, but even when they sell them, they go
and live somewhere else. Everyone lives somewhere. And, of course, the contrast is
that with commercial property, when the economy is really bad, people might have to
sell their businesses or just shut them down, and what happens to those premises?
They end up being vacant, right. They’re empty.
So, one of the big advantages of residential property is that in good times as well as
bad, you tend to have much more certainty of cash flow. Even if your rents on your
residential properties have to come down by 20 percent or 30 percent, because the
economy is down, you’ve still got rental income coming in. But with commercial
property, if the times are bad and you lose a tenant, you’ve got no cash flow. Of course,
times are good and you lose your tenant, you’ve got a chance of having no cash flow,
but at least in good times you’ve a good chance of attracting a new tenant.
So we’re going to draw a chart here, and we’re going to talk about residential property
versus commercial property, and the first difference is cash flow certain. You tend to
always be able to get a tenant for your residential property. In fact, I’d go further. If
you’ve got a residential property and it’s been vacant for three weeks and you’re trying
to get a tenant, what is the problem? Is it that the color of the carpet in the living room
is wrong? The rent’s too high, right. That’s all it is. Drop the rent by $10 or $20 or $30 a
week, and you’ll have a tenant come along. Of course, when that happens, you’ll say,
“Gee, maybe I should have held out and maybe only dropped 10 a week.” Okay. So,
these are cash flow certain, and here is some cash flow less certain, because that is
one side of the cash flow equation.
What do you think the other side might be in comparing residential with commercial?
Under which circumstances could commercial offer an advantage over residential in
terms of cash flow? Yes.
Lower return?
A higher return. Possibly, but not necessarily. There could be high-yielding residential
properties, usually in the less good suburbs, or low-yielding commercial properties,
usually in the worse suburbs, as well. Yes.
Woman: You can also have a corporate client.
Corporate client, client with a real certainty of rent. In other words, the chances of that
client falling over and defaulting is a lot less. That’s very valid, but there’s something
even more important. What’s the major difference between commercial and residential?
Yes.
Woman: Lower maintenance costs.
Lower maintenance costs. Well, that’s also true. Keep these in mind, because these are
further down on our list.There’s a fundamental difference between residential and
commercial. David, right in the front.
Woman: With commercial you have a lease.
Right, with commercial you have a lease. All right. So, let’s put that one down as our
second point. I’m just gonna put “no lease” under “residential.” Now, I know some of you
will say, “Well I know people who’ve got a residential lease.” But look, they tend to be for
six months or one year, and in many countries they are the exception rather than the
rule. In most places, you rent a property out and the understanding is that it’s going to
be month-to-month or every two weeks or something, and the tenant has the right to
give notice sometimes as short as three weeks that they’re leaving. And what’s worse,
often they just leave after they haven’t paid for a couple of weeks, and you’re left
wondering whether it’s worthwhile pursuing them.
Be that as it may, whether there are leases or not, they are six months or 12 months,
maybe you get two years in some extenuating circumstances in some countries; in most
cases they are nonexistent or very short-term. The difference is with commercial
property, you have a long-term lease. Now, these leases can be as long as 20 or 30
years. They needn’t be. They might just be two-year leases. They might have rights of
renewal, so it might be a five-plus-five-plus-five-year lease. And what that means is they
sign up for an initial period of five years, and then at the end of that five years, the
tenant has the right to renew the lease for another five years, and then at the end of
that five years, they’d have a second option to renew it for a third period of five years.
Get one thing very clear : This right of renewal is not for the benefit of the landlord. It’s
there for the benefit of the tenant. In other words, the landlord can’t say at the end of
that first five-year period, “Well I want to force you to sign up for another five years.” He
can’t do that. But if the tenant says, “I would like to sign up for another five years,” then
he has that right. So, the right of renewal is for the benefit of the tenant, and I find it’s a
very interesting thing, because where a lease has a right of renewal, often the owner of
the property (the landlord, if you like) in submitting a finance application to the bank will
go on and on about how wonderful it is. It’s a two-year lease with a 20-year right of
renewal. Well, that doesn’t count for anything. It’s only valid if the tenant signs up for that
next period of five years.
However, the tenant going to the bank saying, “I’m starting this new business, and my
rental is nice and low. It’s a good rental for me, and I’ve got a right of renewal. If I like
the premises, I can stay there longer.” That would work in their favor. So, just keep that
in mind.
Having said all of that, when you go to the bank as a landlord, should you or should you
not talk wildly about the fact that you’ve got three rights of renewal for five years in
there? Absolutely you should, because their perception is, “Wow, this is a pretty long
lease.” All right, even though it’s not guaranteed. That’s a tangent, because the crux of
the matter here is that commercial property absolutely has a lease involved with it, and
that lease document is really your guarantee to the cash flow. And when you buy
commercial property, what you’re really buying is not the land, because land doesn’t
generate any income. You can’t even depreciate land. You’re not just buying the building,
because the building does depreciate. You have to repair it, and fix the roof, and paint it,
and replace things. What you’re really buying, when you buy commercial property, is
you’re buying cash flows as represented by those lease documents. And the longer the
lease, the longer that period of cash flow that you’ve got coming your way. And when
banks advance you mortgage funding to acquire property, they are tending to do it on
the strength of that cash flow and, therefore, the strength of the lease, and that’s why
the quality of the tenant is so important.
And as we said a moment ago, if your tenant is a well-known tenant, cash rich and
doing very well, that is a better tenant to have than a new upstart that no one’s heard of
and they call themselves Fly By Night Enterprises. So, that lease is all-important, and
we’re going to come back to that. In fact, we’re going to walk through a sample
commercial lease document and highlight some of the pertinent clauses. How many
think that might be useful? Great. So that you know what sort of things you should make
sure are in your lease document, perhaps what shouldn’t be there, and it will give you a
feel for what sort of things are covered. Okay. Huge difference. What are some of the
other things? We mentioned some of them before. Yes, sir.
Woman: In a lot of leases the tenant’s required to pay for the outgoings.
Absolutely. I’m going to call that number three, and we’ll just call it “outgoings.”
Absolutely right. With residential property, you as the landlord will tend to pay things like
the insurance premiums and the council fees for collecting garbage and that sort of
thing.The tenant usually pays the utilities, the electricity and water if it’s separately
metered and charged, gas bill, perhaps, but the landlord, the owner of the property in a
residential situation pays most of the outgoings.
Most commercial lease documents specify that the tenant pays the outgoings. They’ll
pick up the tab for the utilities and the insurance premiums. In fact, a lot of lease
documents stipulate that you, as landlord, can buy insurance to cover you in the
situation of loss of rent. In other words, if the tenant goes out of business and there’s a
shortfall of rent, or they’re temporarily out of business, or let’s say there’s a fire situation.
You understand that you can have insurance coverage to protect you against fire
damage to your building. But let’s say your building, where your tenant operates, is
damaged by fire, and, therefore, that tenant cannot operate there for three months.
Three months being the time it takes to repair the building. The tenant, therefore, will
say, “Well I shouldn’t have to pay you rent for three months, because I don’t have the
use of your building.” Well, you can get insurance to cover you there. It’s called
consequential loss insurance, which gives you the rental income that you would have
gotten from the tenant. And here’s the deal. In most lease documents, the tenant pays
the premium for that insurance, and it’s just an industry standard. It’s a further example
of the tenant pays all these outgoings, and they’re happy to do so. It’s not usury, in the
sense that you could pay it yourself, but then you’d probably want to increase your rents
to compensate. So, all you’re saying is the following: You are happy to lease these
premises at a certain rental and if you’re going to take the risk on the increases and the
rates of the insurance and all that sort of thing, then you’re probably going to have to
increase the rate more than the tenant would end up paying if they paid all those
premiums, because then they’re taking that risk. It’s risk management, if you like. All
right. So, the outgoings.
Can you give me another example of the differences between commercial and
residential properties? Right in the front here.
Woman: Probably certainty of income, if you have a tenant like a major department
store or a bank, you’ve probably got a real certainty of income.
Right. Certainty of income for two reasons. One is that you are covered by a lease
document, so they’ve signed up for 10 years or 20 years. And secondly, if it is a big,
well-known company, then you’re right.They’re going to be much more certain to be
paying you rent for that period than if you have some individual residential tenant and
you don’t even know if the name he gave you is his real name or not. Absolutely. Yes,
Denise.
Woman: You have to pay state duty on a commercial property. Is that right?
It used to be, in the last millennium. We won’t hold that against you. It’s been abolished.
It used to be that you paid up to 2 percent on commercial.They’ve abolished that, as
well they should’ve, just like Belgium should abolish its 3 percent tax on mortgages. It
was just an opportunistic tax that the government could impose on us, because few of
us protested and therefore they could extract it. Yes, Wayne.
Woman: One downside for commercial is you might have to fit out the premises for the
tenant, where in residential you obviously don’t have to do that.
Oh, that’s an interesting thing. I would put it slightly differently. If the market is strong
and there’s big demand for residential property, and you’ve got an old dunger of a
house that hasn’t been done up, well you’re not going to find a tenant, or you’ll only find
a tenant at a very mediocre rental level. But if the mar ket is soft and you can’t find
tenants anyway, well then surely for you to attract a tenant, you’re going to have to offer
some advantages, and one of them would be to have a nicely done up place.
Whereas with commercial tenants, I would tend to say that they are so keen to run their
business, they derive their income that way. They send their kids to school from the
proceeds of running their business. They buy their cars. They have their holidays from
the proceeds. So, they have a vested interest in having their business look good. So,
they’ll tend to take onboard the task of painting, paper hanging, and putting new carpets
or floor coverings in.
What is true is that often in a commercial lease document it will stipulate that every five
years the landlord is responsible for doing certain things. He might have to replace the
wall coverings or whatever. However, equally true is the fact that in many commercial
lease documents it says that the landlord is only responsible for maintaining the outside
of the building and keeping it watertight, and apart from that, the lessee is responsible
for the interior. And it often goes further. In many instances you stipulate that the lessee
has to, every three years, paint the inside of the building. So, I think it’s a bit of a call.
There are some cases where you’re better off with commercial, some cases where
you’re better off with residential, but it’s good that the point was raised. Right here in the
middle.
Woman: Couple of things. I’ve just been involved in a situation where as a tenant I’m
leasing a commercial property, and they did this incredibly well, and we didn’t really have
a lot of choice in it. We needed the property, and one of the things that I discovered was
that any improvements that I made inside was counted against me when it came to
assessing the rental next time around. And secondly, as far as a fit-out was concerned, he
did a very clever thing, where part of the fit-out was kind of capitalized, and he did a deal
where if we stayed there for a length of time, there’d be a lesser payback than if we exited
early. So, in other words, he made it very, very attractive for us, but hooked us into
basically higher rents than what he would have otherwise extracted. From my observation,
commercial property’s heavily stacked in favor of the landlord, and you can make it work
for you in all sorts of ways.
That’s interesting, and does it highlight the need to really study that lease document
before you commit yourself to it? Because what happens in many countries is you end
up with a rather standardized commercial lease document, and that’s the case in this
country as well, and we’ll review one of those. Because I used to write up all of my own
leases and they ended up being 86 pages long, because you wanted to cover every
contingency. And then every time you had a problem with a particular commercial
tenancy you thought, “Wow, to resolve that in the future, I’ll incorporate that into my
lease,” and this thing grew from 30 pages up to 86.
However, the downside of that is when you get a new prospective tenant, and you show
them the lease document, and they say, “Whoa, I’ve got to show this to my lawyer.” Well
he was on holiday for a week. He came back, had a stack of other things to do. By the
time he got around to reading it, three or four weeks might have gone by and, at best,
you’ve missed out on four weeks of potential rental income. So, the advantage for me,
as a commercial landlord, in having a standardized document is I can just tell the
prospective tenant, “Look, it’s the standard document. Mention that to your lawyer.” They
pass it on to the lawyer, and the lawyer says, “Well that’s fine. We’re happy with that.”
Now, you may have slight variations in the text of the standardized document, but they
are usually limited to one or two paragraphs where you might eliminate them. For
instance, the standard document makes provision for a guarantor, so that if it’s a
company that’s leasing the premises, you might want to have the directors or the
owners of the company in as guarantors. However, if an individual leases it in his or her
own name, then you don’t need that guarantor clause in there, because the fact that it’s
in their personal name means that person will be guaranteeing it anyway.
So, there are slight variations you might have in that lease document, but other than
that, it’s a simplified process. And I would encourage you all to strongly consider using a
standard lease document, because, firstly, it means you won’t get these anomalies. And
I’m not in the commercial property market in order to screw an extra few percentage
points out of my tenant because I’ve put a clause in there that they didn’t twig to. And I
think the situation you had where if you make improvements, then you end up paying
rent on your own improvements. Now that you know about that, I’m sure that you’ll look
out for it next time, because in my lease documents it has that the tenant can make
improvements at his own expense and then they just stay that way, no extra rent for
that. However, if they want me to make the improvements, I’m happy to pay for them,
but they will pay a percentage point rental on the validated expenses that I’ve made as
part of their rent, and you specify the percentage rate depending on market conditions.
So, if market conditions are at 8 percent, you might put that in. If they ask me to do
something, I spend $10,000 on it, they pay 8 percent of that per annum in extra rent
and that’s fair from both perspectives. They get the improvement they want, and they
only pay the fair market rentals for that.
So, would you agree that next time around you should look more for those details and
figure out what is in that contract? Don’t sign any document, ever, unless you
understand all the conditions, and I’m a stickler for this. You get a rental agreement for a
car in a foreign country and they say, “Just sign here, here, and here,” and I’ll say, “Well
what do I sign here for?” “We don’t know, but everyone signs it. Just sign it. We’ve got
someone waiting behind you.” So, I need to know what the implications are. All right.
And they get you to do all kinds of things that perhaps you wouldn’t really feel
comfortable about. So, read all those clauses. Wayne.
Woman: In your contracts for commercial, do you stipulate any improvements by the
tenant have to stay part of the building when they vacate? Because I know when I’ve done
some buildings, the tenants have actually stripped the place clean.
I always make sure that we come to an agreement before any improvements are done.
They’re not allowed to do anything to the building without my expressed permission, and
then we agree as to whether it’s considered a fixture in there, if it should stay part of the
building, or whether it’s something that they can remove when they’re done. For
instance, if I have record shops and they have all those racks with slots for CDs and
tapes, and there’s little value for me in retaining them if I don’t want to lease it again as
a music store, so, I want to make sure that they install those, even though they look like
permanent fixtures, in such a manner that when they rip them out, they don’t do much
damage.
You’ll also notice with tenants that when they go into your premises, they’re all hyped up
and excited and they’re very careful, but when it comes to leaving, they don’t really care
how they leave it, they just want to move on, which is a natural human condition. So, my
concern is what happens at the end, but you do have to watch for that.
Woman: Well, one of the significant advantages of commercial is being able to recover
your management costs.
Well, that’s an interesting point. I’m gonna write that one down as another point, and
we’ll just put “management costs.” Let’s say you have costs in managing a commercial
property. You have someone going around to collect the rent or to make sure it’s been
entered in the computer system correctly. You have all kinds of other management
expenses. Most leases do have a provision where you can charge an extra 3 percent of
the original rental as a management fee, but I’m going seed another thought with you.
A lot of commercial tenants feel that they are being ripped off a bit because all these
costs are loaded in. I have never charged a management fee. I absorb that. It’s part of
my profit. It’s an operating expense for me. Just like if you run any other business,
you’ve got all kinds of expenses that come out. So, I agree with you that it is a standard
thing, particularly in the larger commercial leases. If you’re talking about a 28-story
building somewhere in the CBD of downtown, then you’re going to have that situation,
and you can’t really charge it in a residential situation.
Imagine if you say, “Well, your rent is $1,200 a month or $300 a week plus a $15
management fee.” They’re going to say, “You’re crazy,” right? So, you can’t do it with
residential. It is common in the commercial world. I tend to absorb it.That’s part of my
cost. Just like I have never charged key money. Key money is an amount you charge a
tenant for the right to go into those premises, and it works particularly where you’re in a
very desirable spot. A property becomes vacant and you’ve got 15 people vying to get
in, and what a lot of landlords do is they say, “Well, there’s key money.” It’s the cost to
get the key, $80,000. All right. But it also establishes a precedent that I don’t think is
particularly healthy, and I’m one of these in favor of not having key money charged.
Woman: Another factor is the ability to improve the lease. I mean it’s a living document,
whereas most tenants and landlords consider that once the lease has been signed, if it’s for,
say, a six-year term, they put it in the drawer for six years and pull it out after five and a
half years to see where they stand, whereas it’s a living document. You can improve that
100 times through that period if you want to, and if the tenant comes and says, “Look, I
want another door in the side of the building,” you can say, “Well, yes I can. Look, I’m
quite happy to do that, but given that it changes the building for a specific use, I’d like
another three years on the lease in consideration for that alteration, and more often than
not, from my experience, they’re more than happy to agree to that. So, although the initial
lease term might be six years, you actually can wind up extending that a number of times
during that initial six-year period. And that, I think, is the biggest mistake, from my
experience, a lot of commercial property owners make, is they don’t recognize the lease as
a living document. They think it’s frozen from the moment they’ve signed it until the first
term is up.
I fully agree, and I think that’s a great point, and you should all take good note of that. It
is a living document. Usually it’s the tenant who approaches you with some request for
something. Would you agree with that? He says, you know, “I want this done, a door put
in,” or “I see you’ve got some parking slots out the back there. Can we incorporate those
in our premises?,” or “I’ve got this café in the front.There’s only one doorway. How about
we blow the front wall open and then make it so that we can put little terrace seats
there?” And you can say, “Sure, I’m happy to do that, but how about we extend the
lease or do something else to it, change some of the conditions in it,” and as long as
both parties agree to that willingly, then you’ve got an improved lease.
Remember that lease document is the strength of your cash flow. In fact, when you get
into really big numbers, like you’re talking about huge buildings in the international
cities, if you’ve got a good enough cash flow, you can securitize your loan. It’s the cash
flow that you can, in fact, turn into a lump of cash. You can sell that. So, good point.
Someone else. Another big advantage of commercial property. Fiona.
Woman: In New Zealand for commercial, we’ve been hit by the OSH standards, and
we’ve got clients in Hawk’s Bay, who have had to upgrade their commercial buildings to
OSH standards whether they’re empty or not and that is extremely expensive.
OSH being Occupational Safety and Health, right?
Woman: Yes, sorry.
This is where the government deems that imperative to stick their noses in a business
that otherwise people are very happy to conduct on their own.
Woman: Absolutely.
And say that, “We think you should bring your building up to this standard,” even though
tenants would be happy to pay the lower rental that they could otherwise be paying for
the premises the way they were. Because if you spent $458,000 bringing your multi-
story building up to standard, will you possibly have to charge more rent to recover that?
Of course.
Woman: The other thing is that if you’ve got tenants in a residential property who aren’t
paying their rent, it can be damn near impossible to get rid of them, because they have this
four-week lay-down time, and if they pay their rent one day within that time, they’re back
in that house. Whereas in a commercial property, if you haven’t paid rent, you can lock
them out on the day that they haven’t paid the rent.
Absolutely. That is a crucial point. With residential properties all over the world, you’ve
got a hard job being able to get rid of people. In fact, before we started we heard of one
guy in England who was occupying a premise as a squatter for 22 years, and eventually
there’s some law where he could say, “No. I’ve been in there that long. I have a right to
get this property,” and they ended up giving it to him, and he promptly turned around
and sold it, I understand, for £230,000.
I know in the Netherlands they have a similar funny law regarding squatters, where they
have all kinds of rights. And even in this countr y, if you as a residential tenant don’t pay
your rent for weeks – I think it’s up to three weeks – you can get away with it. And then
the process you, as landlord, have to go through to extract that money from them is so
difficult and arduous that most people don’t even bother. They think it’s not worth the
effort. “Let’s move on with life,” and of course the tenants know this. So, you get
professional rent absconders, and they just move around from place to place and see
how long they can string it out before they move on.
Whereas with commercial property, let me tell you how that works. Most lease
documents say that if the rent is not paid within seven days of the due date, you can
evict them. It goes beyond that. Many countries have a law known as the Distraint Law,
and in this country it’s called the Distraint and Replevin Act of 1908, and what it means
is if they haven’t paid their rent, if they’re behind by at least 14 days, you can go in
there and seize the premises. You can change the locks on the premises and seize
their goods.
Now, there are very strict rules about what you have to do with those goods to get your
money back. For instance, you have to take them away from the premises, but by no
more than three miles. You then have to store them in a place that is safe and secure
and insured. You then have to run advertisements of a certain minimum size in the
local papers, for a certain minimum number of days. But if you conform to all these
things, you can run a sale of all their goods, which you can use to recover the money
owed to you.
Now, the mere fact that you can do that is a huge incentive for commercial tenants to
make sure they pay the rent. Right? These are very strong factors in favor of a
commercial tenancy, and I have only had one situation where I’ve had to evict a tenant
for continual nonpayment of rent, but it gives you a tremendous feeling of power. Not
power in a wrong sense. I just mean you’ve got control over the situation. Whereas with
residential tenancies, when you don’t have someone pay the rent, and I’m sure that all
the residential landlords out here, you’ve experienced this at one stage or another, and
it’s not a pleasant task going around to visit them and knocking on their door. It’s one
thing if they hide from you because they think, “Oh, the landlord’s coming,” but it’s
another thing if a big, burly chap opens the door and says, “What do you want, pig
face?”
EXERCISES
In the following exercises we are going to cover the merits of commercial property as
opposed to residential property. Please be very honest with your answers, so you can
use this information the next time you are deciding between a commercial or residential
investment. Good luck!
1. What is the one major advantage of residential property? How does it differ from
commercial investments? Write down your answers in the space below.
2. What is the one major advantage of commercial property? How does it differ from
residential investments? Write down your answers in the space below.
3. What is the one thing you are really buying when you purchase commercial
property? As a landlord, how does this affect your position with the bank when you
go to obtain a mortgage? What can you do to improve your position as a landlord
and owner? Write down your answers in the space below.
4. What are the outgoings? Who usually pays the outgoings in a residential
situation? Who usually pays the outgoings in a commercial situation? Which
scenario is more beneficial to the landlord? How have you personally dealt with this
issue in your investment properties? Write down your answers in the space below.
5. As a commercial landlord, what are the advantages of having a standardized

lease document? What are some of the things you should include in this document?
What kind of lease document do you presently use? How well does it work for you
in each particular situation? Write down your answers in the space below.
6. Why is a commercial lease document considered a living document? What can

you do to it that you can’t do with a residential lease? What are the advantages to
the commercial landlord with this type of document? Write down your answers in the
space below.
7. What is the major difference between residential and commercial real estate
regarding your ability to collect rent? Which is more advantageous to the landlord?
Why? Which is much more difficult for the landlord? Why? Have you ever been in
the situation (residential or commercial) where you had a hard time collecting rent
from a tenant? Please describe what happened and what you could do differently
the next time. Write down your answers in the space below.
1-800-525-9000
w w w. n i g h t i n g a l e. c o m

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4-STEP

© MMIV DR. DOLF DE ROOS ©MMIV NIGHTINGALE-CONANT

Step#1: Investigate an Investment’s Potential 4

Step #2: Preparation is Key 18

Step #3: Planning Prevents Impulse-Purchasing 35

Step #4: Pro-activity Reaps Profits 49

Best of luck with all your real estate investments!

2. Ask yourself the following question: Am I a saver or a spender? What pattern do

“You’ve got to be joking,” I hear someone saying.

Now, is that enough to put the fear in you or not?

This is around 1992.

Woman: Marriage protection.

Marriage protection, that’s an interesting one, because when we say marriage

Woman: Things like death duties.

Woman: No. The company buys the property.

Who owns the company?

Woman: Well the trustees are the shareholders. Is that right?

Woman: That’s right.

Which means the trust owns the company.

Woman: Or just the company’s name?

Woman: Oh, okay.

STEP #3: PLANNING PREVENTS

And some of you don’t get it yet; I can tell.

It’s got to be, by definition.There’s nothing magic about it.

Woman: The 50¢ one.

Woman: It’s indifference.

They go further. This is an advertisement pitched at small-business people. “To cut

The answer, you’re all saying, is yes. Why?

STEP #4: PRO-ACT IVITY REAP S PROFITS

Woman: You can also have a corporate client.

Woman: Lower maintenance costs.

Woman: With commercial you have a lease.

OSH being Occupational Safety and Health, right?

Woman: Yes, sorry.

5. As a commercial landlord, what are the advantages of having a standardized

6. Why is a commercial lease document considered a living document? What can

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