We talked all about negotiating real estate deals, including tips on how to be a better negotiator and pitfalls to avoid when negotiating real estate. Check out the full podcast here:

Podcast 98: How to Negotiate a Real Estate Deal with J and Carol Scott

CLICK HERE TO BUY IT NOW ON AMAZON!

In 2013, I released my best-selling book, “The Book on Flipping Houses.” Since then we’ve sold over 90,000 copies and — based on the feedback I’ve received — the book has literally impacted the businesses and lives of thousands of investors around the country.

But, the one aspect of investing that the book didn’t delve into deeply enough was how to get the most — and the very best — deals when buying and selling investment property. Whether you’re working directly with buyers/sellers on unlisted properties or whether you’re working through real estate agents on MLS listed properties, a lot of investors are struggling to find and close deals these days.

The Book on Negotiating Real Estate will teach you how to maximize your deal flow, and your profits, when buying and selling property. Combining the science of negotiating with in-the-trenches real estate advice, the book contains true-life stories that highlight how strong negotiation can result in more and better deals, as well as lots of sample dialogue that will teach you both what to say and how to say it in order to maximize your chances of reaching a profitable deal.

Here are some of the things you’ll learn from this book:

* The principles behind successful negotiation

* The psychology of building relationships to gain negotiating leverage

* How to uncover and use information to tip negotiating outcomes in your favor

* Strategies for defining optimal offers and counter-offers

* Tactics for in-the-trenches negotiating and overcoming objections

* Strategies for using concessions to get your deal to the finish line

* Tips for overcoming tactics employed by those on the other side

* How to overcome the challenges of making/receiving offers through agents

* Tactics to renegotiate issues that arise from contract contingencies

* Strategies to get the best of it when buying properties from banks and HUD

* And MUCH MORE!

My co-authors, Mark Ferguson from InvestFourMore.com and my marketing genius wife Carol, and I spent the past 18 months creating this book. Not only do we think you’re going to love it, but we think it will help you generate lots more deals — and lots more money — in your investing business.

It’s available in both paperback and Kindle formats — check it out HERE…

We’re still about three weeks away from the two year anniversary of putting that rental on the market, but the rent and all expenses have been paid through that anniversary date, and I don’t expect any surprises in the next three weeks. So, instead of waiting a couple weeks to put together the 2-Year Update, I thought I’d just knock it out a little bit early.

Before I jump into the financials, here’s the basic recap of the year:

• After their one year lease was up last February, our first tenants decided to go month-to-month at $1500/month (instead of $1450/month), as they were planning to look for a place to buy. They gave their 60 day notice in July and moved out at the end of September.
• The property was very messy while the original tenants were still in the property, so we waited until move out to start marketing. We offered a half-month free rent as an incentive, and got a new renter in the property about two weeks after the first tenants moved out — a one year lease at $1450/month. With a half month of the property vacant and a half month of free rent to the new tenant, we lost about a month’s rent during the turnover.
• We spent a little over $1000 in maintenance for the year (including turnover costs), plus another $200 for cleaning between tenants.
• Turns out we had the wrong type of insurance on the property (landlord insurance instead of condo insurance), so we were able to bring our insurance costs down from nearly $500/year to under $200/year.
• Our property management company has continued to do a good job, with just a few minor hiccups here and there.
• Overall, probably spent about 5 hours this past year dealing with the property — notices from the HOA, questions from the management company, filling out forms, and one trip to the property to pull some weeds because we couldn’t get in touch with our landscaper and the HOA threatened to fine us.

Here is what our Profit and Loss Statement (P&L) looks like for the first year:

A few financial notes before I jump into the financial metrics:

• This represents 7 months of income at $1500/month (when the old tenants were month-to-month), and about 4 months of income at $1450/month (new tenants)
• There is no CapEx in this report, as CapEx doesn’t show up on a P&L – and because we didn’t have any CapEx last year. That said, most CapEx (roof, exterior, etc) is covered by the HOA, so that number will be proportionately lower long-term (though there’s a monthly HOA cost in our expenses).
• Property management fees include an entire first month tenant placement fee ($1450) – we only have two years of data, but so far, the average tenant stays 1.5 years, so we’re paying about $1000/year in placement fees. That’s a good bit, but it’s nice to not have to worry about finding tenants ourselves.

Our Net Income was $8338 – on a total cash investment of $79,374, that represents a cash-on-cash return of about 10.5%.

As I mentioned last year, my goal is typically about 12% cash-on-cash return, but this number will fluctuate over the years, and this is certainly within my acceptable range. If we were to leverage the property (take a loan on it), we could likely get that number closer to 15%, but we’re comfortable with having it paid off and making 10% these days.

Our total expense ratio (including rent loss and CapEx) for the year is about 46.16%, if you assume market rent at $1450/month.

While this number will fluctuate over the years with changes in CapEx, vacancy, additional turn-over costs, amortized tenant-placement costs, etc., for the second year in a row it falls squarely in line with the “50% Rule.” It’s actually lower than 50%, which is good, given that maintenance and capex tend to rise as the property ages. So, I’m comfortable saying that the 50% Rule most certainly applies to this property.

In the coming year, the HOA dues have increased from $165/month to $172/month — nothing significant. And there are no other major changes that we can currently forecast. That said, this business is full of surprises, so we’ll see what Year 3 has in store for us…

The past year was another good one for the business. While we didn’t do as many deals as we would have hoped/liked — the market is heating up and there is a lot of competition — we’re finding that there are still good deals out there, if you’re willing to put in the work.

Here is a summary of what we accomplished last year:

• Participated in 27 deals. This included everything from doing our own deals to partnering with other flippers on deals to lending on deals. At this point, we are striving to outsource as much of the day-to-day flipping business as possible — partnering with other investors and focusing on lending has allowed us to do that. We still stay involved in the deals we’re part of, but unlike the first several years in the business, I don’t spend much time dealing with contractors, suppliers and real estate agents.
• Purchased a 2nd and 3rd rental units. This was the disappointing part of 2016. We were hoping to purchase a whole lot more rental properties in Maryland and other parts of the country, but the deals just didn’t materialize. Part of the problem was my lack of motivation to go out of find rental deals (this isn’t my strong suit), but the other issue is that in my area, returns on buy-and-hold properties have decreased substantially over the past year. This is the downside to being in a very stable market (outside of Washington, DC) that has a VERY large number of investors. But, we did pick up two more units.
• Scaled the partnering/lending business. One of my big goals last year was to scale up the number of deals that we did with other investors. This includes both partnering on deals and lending for a fixed return. Happily, I was able to find several investors in my area that I was comfortable working with, and did multiple deals with four different investors.
• Getting back to New Construction. With our desire to be more hands-off in 2016, we didn’t do any new construction projects on our own. But, we’re planning to get back to that in 2017. We are currently negotiating a deal right around the corner from our personal residence, and if we can get the property, this will be our first new construction project for 2017. Stay tuned!
• Speaking. I do a good deal of speaking to real estate groups, and my goal was to do a good bit of speaking in 2016. Given that I still don’t charge any speaking fees (other than reimbursements on some occasions), it’s not surprising that this wasn’t my highest priority. But, I still spoke to about a half-dozen groups in four different states. While it’s probably not the best use of my time (again, I don’t charge anything), I love meeting other investors and I love getting the opportunity to share our experiences and knowledge.
• Writing. My wife and I started writing three books in 2016! We’re expecting to release one in the next couple months, another over the summer and the third in the fall.
• Gave up looking for an apartment complex. One of our 2016 *hopes* was to find a large residential complex to purchase. We’ve been looking for something in the 50-200 unit range for the last couple years. Unfortunately, with the commercial apartment market being so oversaturated, we had to give up looking. We’ve looked at hundreds of deals across 20+ states, and never got very close to getting any of them under contract.

Our goals for 2017 are pretty modest. We’d like to participate in at least 30 deals this year, purchase a couple more rental units, finish three new books, do at least one or two new construction projects and hopefully get a chance to travel to meet more investors around the country (and speak to more groups).

I’ll try to do a better job of keeping up on the blog as well…

While I never planned to make the video public (it wasn’t very polished), I’ve gotten some good feedback on it, so I thought I would post it for anyone who was interested in learning more about the 50% Rule and how it’s used:

50% RULE: VIDEO TUTORIAL

Enjoy!

• Our tenants moved in the end of February 2015, and when we offered to renew their lease for another year, they asked if they could go month-to-month starting March 1 of this year. They are looking for a house to purchase for themselves, and I agreed to allow them to go month-to-month with a $50/month rent increase and 60 days notice prior to terminating their lease. I’m hoping they stick around for a while longer, but the bright side is that the closer we get to summer, the easier it will be to rent if/when they leave.
• We had about $1200 in maintenance costs over the past year, including a couple HVAC issues (new thermostat/broken compressor) and replacement of the dryer, which we knew was old and was near end-of-life.
• We probably put in about two hours of time/effort on the house this year. That was mostly email and phone calls with the property management company and paying other bills (HOA, utility, insurance, etc). So, this was nearly a passive investment for the year.

Here is what our Profit and Loss Statement (P&L) looks like for the first year:

A few financial notes before I jump into the financial metrics:

• This represents 12 months income at $1450/month, plus a few extra days that were pro-rated for early move-in. The data would be more accurate if about $50 was deducted from the gross income line for those extra days. That said, it was easier to just let the numbers be off by a percentage point than to go back and alter my books – this is more than evened out by the fact that there was a $200 electric utility expense from prior to move in that was paid after. So, my numbers are actually a bit better than indicated.But, it’s close enough.
• There is no CapEx in this report, as CapEx doesn’t show up on a P&L – and because we didn’t have any CapEx last year. That said, most CapEx (roof, exterior, etc) is covered by the HOA, so that number will be proportionately lower long-term (though there’s a monthly HOA cost in our expenses).
• Property management fees include an entire00 first month tenant placement fee ($1450) – given that the tenants are staying more than a year, this number is disproportionately high.

Our Net Income was $8756 – on a total cash investment of $79,374, that represents a cash-on-cash return of about 11.03%.

My goal is typically about 12% cash-on-cash return, but this number will fluctuate over the years, and this is certainly within my acceptable range.

Our total expense ratio (including rent loss and CapEx) for the year is about 49.83%.

While this number will fluctuate over the years with changes in CapEx, vacancy, additional turn-over costs, amortized tenant-placement costs, etc., for the first year it falls squarely in line with the “50% Rule.” While not every house will fall this perfectly into that range, it’s a good way to double-check that costs aren’t too out-of-whack. That said, I expect expense ratio to be a little higher when averaged over the long-term, as CapEx and vacancy tend to be more costly after the first year than in the first year.

I ran a quick IRR analysis of what my compounded return on this investment would be if I sold today at market price (including selling costs), and got somewhere around 18.4%. Not that I’m considering selling today, but I’m guessing that number will go down over the next couple years — but I don’t have a better place to put the cash, so it’s not a good option.

Anyway, that’s our 1-year update…I’ll continue to update as time goes on and when interesting events occur…

Keep in mind that this data is only for part of a year, so the numbers aren’t very meaningful (for example, I’ve paid annual tax bill in that six months but the amount paid represents 12 months of payments). But, since I plan to provide updates over the long term, I’ll put the numbers down here for future reference…

Here are the highlights of the past six months:

• Tenants moved in just over six months ago (February 23).
• Property is being managed by a professional property management firm, so I’ve been mostly hands-off, other than getting my monthly direct deposits and having to take a phone call here and there and dealing with one maintenance issue. The investment has been nearly completely passive so far.
• Tenants pay $1450/month in rent — so far, it appears that the rent has been paid by the 3rd of the month each and every month.
• The one maintenance issue was with the HVAC system. A blower motor went bad and the freon in the condenser was low. The repair cost more than I was expecting, and had I known the price upfront (which I approved without seeing the invoice), I would have had my own HVAC guy do the repair. But, it was nice that I didn’t have to deal with anything.

Fortunately, that’s all there is to mention…it’s been a very unexciting few months…which I’m very happy about…

Here are the numbers since the tenant has moved in…

Keep in mind that these are actual expenses — they are not pro-rated…so, for example, if I don’t list an insurance cost, that’s because I didn’t have a bill during this period, not that I didn’t have insurance on the house…

As a reminder, I spent $61K on the purchase and $18K on getting it into service (total asset value of $79,374). We don’t currently have a loan against this one, though that’s a consideration in the next 6 months.

The few things that skew the returns down for this short period of time are the one month of rental income I paid the PM, the one year of property taxes I paid, the one year of State personal property taxes paid and the utility bill for the period prior to the tenant moving in.

I expect the 12-month numbers to be more reflective of longer-term ROI trends.

I’ve chosen real estate investing as a vehicle for wealth creation, but I’ve never really taken the time to explain why I’ve chosen real estate investing and why I believe it is (one of the) great ways of achieving financial freedom. Hopefully, this article will explain why I like real estate investing so much, and why I believe that real estate is a great wealth creator for everyone.

I imagine many of you have read articles (like this one) that talks all about how saving money and investing it wisely over a long period of time can generate large sums of cash. The conventional wisdom is that, if you start saving early enough in your life, you contribute periodically to that savings and you invest that savings into a safe, diversified portfolio (stocks, bonds, CDs, etc), you can retire at 65 very comfortably.

Not only does it sound great in theory, but if you do it right (start early, continually contribute, invest in a diversified portfolio), it really works! In 40 years, you can have a tremendous amount of money saved for retirement. There is a major downside to approaching wealth-building in this fashion: Time. In fact, time is a major downside in two ways:

1. This style of wealth creation requires you to start at a very early age. If you don’t start early enough, you won’t have enough time for compound interest to work its magic and start to generate large sums of cash.
2. This style of wealth creation requires decades to build the amount of wealth needed to attain financial freedom from a 9-5 job.

So, while saving, continually contributing and investing in diverse portfolio will certainly work for some people, it won’t work very well for those who aren’t young and/or those who don’t want to wait decades to attain financial freedom. Let’s take a look at an example that will demonstrate what I’m talking about.

Let’s look at three investors, aged 25, 35 and 45. All are saving for retirement. Each saves and invests $1,000 each each month and earns 8% annual returns on their investment — pretty typical of a diversified portfolio.

At age 65, the investor who started at age 25 will have over over $3,500,000. The investor who started at age 35 will have just over $1,500,000. The investor who waited until 45 to start investing will have under $600,000. Waiting 20 years to begin investing cost the investor nearly $3,000,000! In fact, only $240,000 of that would have come directly out of the investor’s pocket — over $2,650,000 of that is lost interest!

Starting just 10 years earlier can even make a significant difference. The investor who starts at the age of 35 will have two and a half times as much as the investor who starts at the age of 45. Clearly, the longer you invest/wait, the more money you have, but other than waiting, there is absolutely nothing you can do to influence the return on your investments. You have no control over how quickly you grow your money.

And again, for those who don’t have the time (are older) or don’t want to wait (looking for financial freedom sooner), this isn’t an optimal recipe for wealth creation.

But luckily for these two groups of folks, time doesn’t have to be the only factor when it comes to trying to achieve financial independence. When it comes to investing, there are actually two important variables that contribute to how much your money will grow. As we discussed, Time is the first. But the second is equally – if not more – important: Rate of Return.

Rate of Return

Again, if you read enough articles like the one above, you would think that the only rate of return you can get on your money is the 7-9% that you get from diversifying your money across lots of paper (stock market) assets. But, is it really the case that all your calculations should be based around the assumption that your investments will return 8%?

There are lots of investing strategies that return more or less than the much-quoted 7-9%. For example, savings accounts return around 1%, not enough to even keep up with inflation. Treasury Bills (T-Bills) and Certificates of Deposit (CDs) return about 3-4%. Obviously, those investments return less than typical stock market returns. Which is why many of us like to specialize our investing into a single niche area where our returns (and wealth accumulation) can be significantly higher?

How much higher? Let’s take a look…

What’s Does a Few % Really Mean

The difference between earning your 8% from a diversified portfolio and earning closer to 15-20% through real estate (rentals, flipping, lending, etc) is probably more than you realize. In fact, a couple percent compounded rate of return can make the difference between being able to retire in 40 years vs. being able to retire in 10 years. For a lot of older investors – and younger investors who don’t care for work – this is the key.

Let’s look at the difference in the growth of your money based on different returns…

Using the example situation above, let’s assume an investment amount of $1,000 per month. For a 25 year old who has 40 years to invest, remember that we can expect to earn about $3,500,000 by the time he turns 65 by investing into a diversified portfolio earning 8%. Now, what if that 25 year old were to receive 15% annual return compounded for the same 40 years…how much do you think he’d have? The answer is, more than $31,000,000! The difference between an 8% and a 15% return over 40 years was nearly thirty million dollars, or 10 times as much!

How about a 45 year-old that only had 20 years to save/invest? To have the same amount as the 25 year-old — who is earning the 8% from a diversified portfolio — when he turns 65, he’d need about a 20% return. If the 45 year-old can increase his investing return from 8% to 20%, he can cut the amount of time necessary to reach his retirement goal (or any financial goal) in half!

Here’s the main point — when you only consider the Time variable of investing, you miss a key element that defines your success as an investor. And that’s Rate of Return.

Why Real Estate?

So, now that you’re (hopefully) convinced that you’d much rather be making a higher rate of return than a lower one, let’s get back to the issue of how to make more than 7-9% on your money like you would with a diversified portfolio of stocks and bonds.

Is 15% achievable? How about 20%? More?

Yes, they’re all achievable. As a buy-and-hold investor, I’ve earned between 15-30% returns (leverage helps). As a rehabber/flipper, I’ve earned up to 45% returns on a relatively large portfolio in a single year. I know investors who have doubled their money (100% returns) in a single year. I even know plenty of part-time investors who can easily earn more than 15% returns on their investments without a tremendous amount of effort or time commitment.

It’s not easy. It requires focus, education, and experience; you must become an expert in your investment area. Sometimes it can take years. But that’s why the best investors are highly focused on one area of investing, as opposed to diversifying. They become great at what they do, and because they are so good at what they do, their returns far exceed the average, and far exceed what they would get if they were to just passively diversify their investments in stocks and bonds.

Joe Fairless has a great podcast and the best part about it is that he likes to get to the point — every episode is focused on getting some basic information from his guests. The main piece of information he’s looking for is, “What is your best piece of real estate investing advice?” I love that format, and I especially love that I didn’t have to figure out what to talk about for an hour…

Anyway, Joe just released my episode of his podcast, and while I probably won’t listen to it (I hate listening to myself), I hope you’ll check it out. If it’s half as good as his other episodes, I have a feeling you’ll enjoy it…

JF217: You Only Have ONE Chance to Make a Good Flippin’ Impression

Want to check out more of Joe’s previous great episodes and awesome guests? Check them out here…

Let me know what you think…and if you think I should be doing more of these things???

Over the next few weeks, I’m going to post some thoughts I have on financial health, how to evaluate yours (or your company’s) and how to best position yourself to ensure that you and your company remain healthy enough to pursue all your investing goals. In this post, I’m going to start with a very simple, yet very powerful, concept in helping to analyze your financial health — it’s called the Balance Sheet.

The Balance Sheet is where you (or your company) itemizes all of its assets and liabilities into a single location, adds them together, and comes out with a number that indicates how much you (or your company) is worth. In other words, the Balance Sheet represents your net worth at a given point in time.

Below, I teach you how to create your own Balance Sheet, and I’ll even provide an Excel template you can use. In future posts, we will analyze your balance sheet to determine where and how to focus your efforts on improving your financial health.

Step #1: List Your Assets

The first component of a balance sheet is a list of owned assets and their values. For the sake of creating a balance sheet, assume an asset is anything that could readily be converted to cash.

Note: While some people believe that – for various reasons – houses and cars should not be considered assets, this is more of an investment philosophy and isn’t applicable when creating a balance sheet or determining net worth. When creating a balance sheet, all property that could be converted to cash should be considered an asset.

So, in addition to you car and your house (if you own one), the following could be considered assets:

• Any cash you have in the bank
• Any investments that you fully own
• Retirement savings
• Life insurance policies
• The value of any antiques, jewelry, or high-value items you own

When trying to determine the value of your assets, be conservative. Your car isn’t worth as much as it was when you bought it (use Kelly Blue Book to find out what it is worth), and your antiques and doll collections are only worth what someone else will pay for it (check eBay to see what similar items are being sold for).

Step #2: List Your Liabilities

The second piece of the balance sheet is the list of liabilities. Liabilities refer to any financial obligations you have, including any money you owe, credit card debt, the balance of your mortgage(s), and any other loans or obligations you have. For your balance sheet, you want to list each of the liabilities you have, along with the total dollar amount you owe on each.

And again, like with the assets, you should be conservative in your assessment; you’d rather appear to have less than you do than to actually have less than you think you do.

Step #3: Calculate Your Net Worth

Now this is the easy part. Once you have your list of assets (and their values) and your list of liabilities (and how much you owe on each), all you have to do is subtract the total value of your liabilities from the total value of your assets, and the resulting number is your net worth:

Net Worth = Assets – Liabilities

To download a template Balance Sheet that you can fill in yourself, click here.