Book > “The ABC’s of Real Estate Investing” by Ken McElroy

Easy, Book Summary by Brian Morgan, April 16, 2008 From: “The Rich Dad Advisor’s Series” Pages in book: 193 Pages in this summary: 7 _______________________________________ Property management is the key for long term RE investment success. Many people are looking for good RE deals. Having partners shares the risk in RE Investing. Normally the first task is to find investors. Larger RE Inv. Loans are secured by the asset not on individual credit. Appreciation of Commercial RE (CRE) is based on the Cash Flow (CF) of the property – the more money it makes the more it is worth (valued at). You have to manage RE Property (REP) right to increase the CF and then you will increase the REP Values. In apartments (apts/condos) your exposure related to occupancy is reduced by the more residents you have – with single residents (homes) it’s either 100% occupied or 100% vacant. In 0% money down deals the interest rates are higher because of greater risk (to the lender). The author doesn’t like 0% down REP deals. The author doesn’t like “flipping” REP. He says – buying and holding income generating assets (REP) is how to build wealth. Instead of selling 1 REP to get a 2nd Larger REP – you need a second RE Investment deal that makes sense so you can bring it to RE Investors. (Such a sell off would produce a high tax rate if the capital gains are not reinvested.) If you need to raise capitol ($) from a large REP – first refinance it and pull out all the equity that you can – this is a no taxable event and you don’t have to put the money back into another investment.

Refinancing a Large REP is done as the REP appreciates – giving you tax free gains. 95% of REP is going to become “more” valuable not less valuable. In a large retail environment that has ten acres – the best RE development would be either multi-unit housing (apartment complex) or office space – definitely not homes or custom homes or “another” retail strip mall. If you have to hard sell your vision for a REP to everyone you share it with – it’s likely the RE Project – when complete – will also be a hard sell also – one that will cost you money. Two voices: voice of reason = common sense Voice of self-doubt = past leading the future Don’t ever consider your past to dictate your future. We likely “do what we need” and “put off what we really”: “want” & “desire”! In RE investing you do this – finding and evaluating REPs, negotiating deals, overseeing contract repair work and possibly managing the REP. You need a “do it” or “leave” deadline – many times to push yourself to achieve what you want. If traveling to invest in other cities – do your research to find partners – look for local property managers, city officials, brokers and others to help with your research to find local partners. You need to be able to find and evaluate a REP and estimate a realistic purchase price that maximizes your monthly income and appreciates the asset. “List price” is meaningless – it normally is established by what the owner “thinks” the REP is worth – the “real” price needs to reflect the actual operations of the REP. The best knowledge is RE Investing comes from your experience – so start and begin learning. Don’t waste time and energy asking “why did we do this” – instead ask “what can we do to get past this hurdle?” There will be many seemingly impossible problems – you must stick to them – work through them and learn to gain experience – do not quit.

Goal setting is #1 process in RE investing. Set a target – work at it – accomplish it. All goals must have work and action to reach them – otherwise they are simply day dreams. Goal should have an income level within a period of time. Goals have to be attainable. Seven Laws of Lifetime Growth: Always make your future better than your past Contribute bigger than you are rewarded for Learn greater than just your own experience (others experiences) Perform greater than your applause Gratitude increases your success Enjoyment increases your effort Confidence increases your comfort Goals are SMART S = specific M = measurable A = agree upon R = realistic T = Time activated Must be written down Must be reviewed – over and over In your business: Make yourself accountable to someone (in the business) Partners are essential for all life and business goals Achieving Goals: Communication Plan Persevere Stay Focused Sample Goal: We will acquire a one 8 unit REP in Atlanta within 12 months and generate at least $4000 average income (per year) over the next 5 years.

You can share this sort of goal with your RE agent, attorneys, Mortgage brokers, and they will contact you when they come across REPs – only if it is specific and not general. RE Business “To Do List” Find your TEAM Evaluate the Market Find a great REP Assign a valuation to the REP Establish a REP plan Develop a budget Manage the REP You must have a team and set goals. You need experts on your team. You need local experts if you are investing out of town. Qualities of Good Partnerships: TEAMS Healthy Debates Open Minded Commitment Similar values Accountability You’ll need: an attorney, an accountant, a RE Broker, a property manager Duties of your team: Attorney – files corporation paperwork CPA – tax advice on your own situation RE Broker – help understanding the RE Market – finding REP too Property Manager – helps you assess properties from an operational perspective – ideas on what you are getting into. Team Members / Others you will need in your network to work with: Appraiser Architect Insurance Agent Property tax Consultant Income Tax Consultant Estate Planner Environmental hygienist Surveyor Structural Engineer

Need to research markets and properties – this is talking to local people, touring an area, taking in the sights of the area. (Normally all tax write offs) Level 1 Research: > The market and town Find statistics and facts You can do most of this online – newspapers and other sites Level 2 Research: > Meet face to face, setting up meetings with local property managers, commercial RE Brokers, community lenders, city officials and business people like the local apartment guide publishers. Level 3 Research: After level 2 you follow p with the leads and referrals from level 2 and ask similar questions – local websites, newsletters, economic development offices, city government contacts and such. Much research (now) can be done online. Be familiar with: -local newspapers, business trade magazines, government websites, trade organizations -Government officials and staff work for you and meeting with you is their job See how much you can find out about your home town (to practice your RE research): online, face to face meetings, and in-depth follow-ups (phone calls) RE Notes: First impressions of areas can be deceiving (of areas) The market is much more important than the property Start right = evaluating your market and sub-market You must become an expert in your market Know the supply and demand of the area Supply = number of rental properties available Ideally – supply should be low and demand should be high Demand = number of people looking to rent (ask brokers and property managers) If area has tons of move-in “specials” = demand is low If rental properties offer no move-in “incentives” = demand is high Value of REP increases based on it’s operations and cash flow (The market value of the property) Indicators of supply and demand Employment’ Population (growth?)

Indications of good areas: New highways, master planned communities, new sports stadiums, new universities and expansions, redevelopment areas, casinos, military bases, airports, company relocations, major events (games etc.) Location is the most important thing – need high visibility (traffic for your REP) Know the market and it’s future better than anyone Finding a good market: Select a market List submarket areas Define the employment picture of the area Define the unique persona of the submarket Define supply and demand of area (estimates) (Ask your team, read visual signals in the area) Rate the submarkets Select your submarket Narrow your target market further based on your initial review Learn the steps necessary to do a “REP Evaluation” Once you have a great feel for the REP Evaluation and arrive at a decision to buy – you have reached a milestone. After this phase your goal is to “tie up the property” – get the REP off the market. Do this by beginning the process of generating the letter of intent or in some cases executing a sale contract. “Tie up the property” = negotiate the terms of the sale and review the REP and it’s operations in fine detail. Lawyers are not involved in the “letter of intent” negotiating process. Letters of intent are designed to be negotiated – the original document is the “starting point” Letter of intent is usually not binding See for letters of intent and purchase agreements and other RE Investing Resources Develop a “due diligence” property checklist as a guide to help you inspect properties. Use your team to help with inspections

Become familiar with income and operating expense items as your discover them for the development of your operating budget Stay calm about problems that you find – it’s good experience to find them during your “due diligence” Be aware and adhere to critical dates in the contract The foundation of your REP Plan will be to determine the expense and income levels that maximize cash flow Investigate hiring a professional property management firm and interview several Run both criminal and credit checks for every new applicant (tenants) Always enforce all policies in your lease – no exceptions Respond fast to your residents with a smile! If you don’t have a plan for the money from the sale of a property (the capital gain) you should not sell the REP I would not sell a REP unless I have 3 REP deals ready to reinvest the money into. The cash flow generated from out REP ensures that we have the ability to live the lives we are doing what we love. There if freedom in that.

______________________________________ Author facts: Ken McElroy has been a “Rich Dad” Property management advisor since 2001, he oversees 20,000 apartment units, manages the MC Company’s in Arizona. The MC Company investment portfolio consists of over 4000 units with a market value of 250 million dollars.


Summary by Brian Morgan, April 16, 2008

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