November 1985
Vol 8 No 2

That was a popular buzz phrase when I was a kid during the depression years in the 1930s. It was used as a conversation stopper when one party had reached saturation from another party’s opinions and solutions to the economic problems of the day. If it were applied to this decade‘s crop of over-educated estate builders, it might reveal a different kind of truth: in spite of all the investment club speakers, tapes, books, and seminars, etc.; most new real estate investors are running out of cash!

In many areas of the country, it also applies to recent college graduates. As many highly paid junior executives, software designers, applications engineers and assorted yuppies are discovering, the good life can disappear quite unexpectedly when one loses one^‘s job. Or it may never arrive if one is just starting out. Why? Because Americans seem to have turned their backs on financial opportunity when it doesn^‘t come wrapped in status, security, respectability, prestige. We^‘ve forgotten what made America a beacon of hope for millions of foreigners for almost 500 years – a chance to succeed.

We^‘re confronted at this mid-point of the decade with profound problems and fundamental changes in the benefits we can expect from investment in single family houses. At the same time, the opportunities generated by all the confusion seem to me to outweigh the negative aspects we^‘re so apprehensive about. For those willing to take a new tack, maybe that pot of gold at the end of the rainbow is still within reach. This issue will address some of these emerging routes to cash and cash flow.

THE BUCKS STOP HERE . . .

That may not be exactly what President Truman^‘s desk sign said, but it sums up the key to any profit making enterprise. If we^‘re going to set out to make money, we must first analyze (a) where it^‘s going to come from, (b) why the current owner would part with it, (c) why he^‘d give it to us instead of to someone else, (d) how much of it we^‘ll be able to keep after expenses, and (e) what we^‘re going to do with it to make it grow faster than it would if we merely re-invested it in our current activities.

Let^‘s set a scenario. Here^‘s today^‘s world. Americans and America are deeper in debt – mid and short term debt – than ever before. Suppose all your credit cards and bank loan lines were cancelled? Right now! Without warning as you read this! Would you be in trouble? Would you be able to pay your debts? Maintain your life style? Keep your possessions? If you^‘re typical, the answer is that cancellation of credit would ruin you financially. If the same premise were to be applied to the Fortune 500, the results would be the same. Ditto for the entire nation. And much of the civilized/un-civilized world. It^‘s imperative that we start to concentrate on ways to increase cash flow and liquidity in view of the fact that debtors at all the above levels are confronted with the above scenario to some degree in the foreseeable future.

So where^‘s the money going to come from? From people who NEED you – and who can PAY you. In the above scenario, stop and think of all the players and of what they need. We have this happening today in the farm belt. Farmers credit is being cancelled. They can^‘t pay their mortgages. Their property is being auctioned but there are few bidders. Un-paid-for equipment is reverting to the vendors. Real estate is going back to the lenders. In turn, they are unable to pay their depositors^‘ interest. Deposits are being withdrawn. Banks are failing at a record pace. Their assets are being sold off.

 

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Look at all the needs that this creates in the farm economy. First of all, there are the collection agencies who try to work out payment schedules with the debtors. Next, there are the people who might supply interim loans against un-harvested crops. There are liquidators who buy surplus equipment, stock, etc. from farmers prior to foreclosure. And there are those who buy the farms lock, stock and barrel from either the farmers or the lenders. There are auctioneers, appraisers, Farm Credit field reps, loan officers, government employees at all levels, social services workers who get involved in re-settling and re-training dispossessed farm families. While the farmer is losing his property, most of these people are prospering in cash flow businesses. That^‘s just the tip of the iceberg. There will be others who benefit too.

Someone must set up re-training programs and administer them. Teachers must be employed. When lenders also go down, FDIC and FSLIC staffs are expanded. Syndicators round up money with which to buy property from farmers, lenders, liquidators and various agencies of the FDIC/FSLIC or the government. Real estate agents and mortgage brokers earn fees. Those who buy at distressed prices reap profits. So do those who provide for their needs. These include accountants, lawyers, bookkeepers, clerks, title companies, insurance companies as well as various vendors who sell them things they need. And what about the farms themselves? They^‘re probably leased to operators who re-hire farm hands, buy seed, feed and fertilizer, open bank accounts, etc. They hedge their profits in the commodity markets, store their grain in elevators, ship product on trucks and trains.

The bottom line is that what is a disaster to one person is a cornucopia of opportunity to another. The same principal holds true for the small single family house investor. Consider two opposing scenarios. (1) Government chooses to reflate the dollar, driving houses up in value. Prices leap beyond the reach of would-be buyers. Interest rates soar just as they did in 1979, wiping out all those with variable rate, indexed loans while benefiting those with fixed rate assumable loans (FHA/VA). Investors stampede into the market buying up rental housing. Builders try to keep pace. The result will be that the percentage of renters to owners will climb. The winners will be lenders with indexed loans, land speculators, people who hold Options, salesmen, mortgage brokers, those with liquid funds or those who can raise money in the equity markets to buy low/sell high.

Now, suppose (2): Government dares not reflate because foreign investors might flee the dollar. Instead, we become aggressive in our foreign trade policies, erecting trade barriers to prevent our markets being swamped with foreign goods. Our economy slows. Unemployment rises. We experience a depression. Government debt increases dramatically due to the demands of social programs. Wholesale liquidation of leveraged properties takes place as renters and investors alike are unable to maintain payments. Banks fail. Most mortgage paper is wiped out in foreclosure and bankruptcy actions. Winners will be those with free and clear property, cash, secure jobs or income streams, or necessary marketable skills.

SERVICE ORIENTED ENTREPRENEURS WILL WIN EITHER WAY!

Anytime a property is owned by someone other than an owner/occupant, it must be maintained and managed by someone who knows how to do it. In both of the situations ‘ described above, many houses will be occupied by tenants, or left vacant. People who never envisioned they^‘d be responsible for real estate are going to find themselves up to their ears in management situations with tenants who are becoming more militant with each passing day. They^‘ll be backed up by politically influenced courts whose sympathies will pass from tax payer to tenant at about the same rate as voters are converted from owners to tenants.

And to add to the aggravation, as homes become more technically sophisticated, maintenance costs will increase as repairmen with necessary skills to sustain our total electric living become increasingly more rare. In this age of college graduates, we are seeing fewer and fewer people willing to seek education in the fields of electrical or plumbing maintenance; refrigeration, heating and air conditioning; appliance repair. As economic upheaval liquidates debt, lenders will be saddled with real estate they can’t manage or sell. Suddenly, they^‘ll be liable for property taxes, adherance to minimum housing and health standards, negative cash flows required to pay for insurance and vandalism, legal confrontations with tenant rights advocates. They^‘ll need help and be willing to pay for it. That’s potentially one of the brightest spots on the horizon for the future in either inflation or depression scenario.

Here^‘s what some people have already started doing to establish their track record and to get set for the future. We^‘re seeing lots of MAINTENANCE WARRANTY firms. They solicit condo and apartment projects^‘ residents and managers. For a flat fee they agree to take care of specific items such as stoves, refrigerators, garbage disposals, trash mashers, air conditioners once the purchaser has paid them $50 for an initial survey of current condition and a proposal. Fees seem to be running at about $300 per year on new units to $500 on older when they can be assured of multiple unit contracts. Condo managers in turn sell the service to residents to pass along the costs. Builders offer the same warranty contract in lieu of any other warranties for a year. Of course, the price varies with the extent of the warranty.

A basic plan would include a lot of minor adjustments such as sticking doors and windows, tightening of loose fixtures, installing dead-bolt or security hardware, cleaning or changing filters, installing new faucet washers, adjusting water heater thermostats for about $200 for the first year. The next level would include appliance repairs up to a certain level for parts – say $50 per call – for another $300. I’ve seen separate contracts just for plumbing stoppages or electrical failures which were caused by a fault INSIDE THE UNIT OR FOUNDATIONS OF THE HOUSE. These eliminated all contractor responsibility for repair support caused by malfunctions outside the premises. There are maintenance and repair associations in which the promoter lines up a variety of independent servicemen on a master contract, then sells memberships in the association for an annual fee which gives the member access to the appropriate repair service on a 24 hour a day, 7 day a week basis. The association guarantees the acceptability of the work. The member pays for it. This is especially valuable when expensive property with complex environmental, watering, energy efficient or security systems is involved. The GUARANTEE of someone to fix something that^‘s broken is worth the membership fee if the house would be unlivable without reasonably fast repair. Just for fun, try to locate someone to repair a washing machine, T.V., furnace or air conditioner on short notice. And heaven help you with pool and lawn maintenance. It’s not unusual to pay $125 per month just for a small lawn with limited trimming required. Pools can run $50/week!

LET’S TALK MANAGEMENT SERVICES!

As rentals grow scarce, companies do well selling lists of available housing to tenants for a flat fee. When there^‘s plenty of space, they turn around and sell rent up services to landlords. In areas where courts are lenient and evictions slow, they can provide tenant rating services to warn owners of militant, non-paying prospects. And they can offer to collect rents for a flat fee or percentage of the gross – or the net – collected. They can guarantee occupancy and rents based upon their own experience and their collection/eviction records for each tenant or property. And they can garner additional income because of their ability to guarantee owners a certain level of rental cash-flow on any property or combination of properties. This will become increasingly more critical in view of the impending tax proposals.

There^‘s one more job that nobody likes: EVICTIONS! Most amateur investors do this reluctantly – and inefficiently. Like any other skill, the ability to evict swiftly can be acquired. If you can learn to save owners money by taking over this task, it is a service that is readily marketed. One company I know is on a $500 retainer. Each eviction costs an additional $50 plus out of pocket court costs.

LET’S PUT IT ALL TOGETHER – HERE’S YOUR BOTTOM LINE:

There^‘s no magic in wonderland – just hard work. If we^‘re going to prosper in this uncertain world, we have to anticipate trends and markets, then move toward profits that we can foresee. Changes in our economic and social environment are creating concern which we can translate into opportunity if we^‘re willing to gain new skills and apply them. If one were to start doing all of the things described in the preceding pages for a fee it should be obvious that a 50 house portfolio – or for that matter – 50 unit apartment or condo project could generate sufficient monthly cash flow to provide a living. Readers who seek a change and who either want, or who have family members who want to embark on entrepreneurial adventures should find rich rewards in the areas I^‘ve mentioned.

But for those who seek the high road to wealth and riches, even greater rewards are there for the asking. FNMA, VA, FHA, FARM HOME, small banks and S&Ls, private mortgage insurers, Farm Credit, etc. who take back properties in foreclosure are either in trouble now or will be shortly. In one case a reader got a distressed lender to put up the money to repair foreclosed properties, then let him lease them with the right to sub-lease at a rate which would guarantee him a positive cash flow. In addition, he also obtained an option to buy or sell, keeping all amounts above the negotiated price as his profit. He made over 2 million dollars in the past 2 years in terms of cash flow and equity. Plus, he still has a management contract with a syndicate to manage the houses the syndicate bought from him.

Think about it a moment: once you^‘ve put in place all the skills and know how to provide maintenance, management, collections, evictions, tenant rating services, it^‘s only a short jump to master leasing properties from owners who employ those services. You can GUARANTEE your results because you KNOW what properties can produce under your control. You can create vacancy and repair POOLING to spread your risk in ways individual owners cannot. Hence, you’ll find them seeking you out rather than vice versa. It doesn^‘t matter whether we have inflation (which you can capture with a long term, fixed rate master lease and an option to purchase at today^‘s value) or depression in which you still get paid in % commissions for rents you are still able to collect; you still have a viable market position which will be better than most others under the same scenarios. And you’ll be in the best position to determine whether or not the owner might be willing to sell, or to buy additional properties which you can profit from. Best of all, you can enter this new position gradually as you gain skill and expertise, increasing your income in direct ratio to your ability. That^‘s heady wine to someone trapped in a dead end job or with skills which computers are rendering obsolete. No computer can ever replace you ever again.

 

Copyright © Sunjon Trust All Rights Reserved, www.CashFlowDepot.com. (888) 282-1882
Quotation not permitted.  Material may not be reproduced in whole or part in any form whatsoever.