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Erica Neal

Erica was born & raised in west Texas, graduating from Permian High School (the school from “Friday Night Lights”). She went on to earn her bachelor’s degree in Finance & Economics from UT Permian Basin. After college, she moved to the DFW area and began her career in finance by working for a large investment firm. She learned the basics of running a financial practice but also saw large holes in the company’s planning process from early on.
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UP COMING EVENTS

Upcoming Events

UP COMING EVENTS

We are continuing to see changes in the economy, legislation and in real estate throughout this pandemic, but its intriguing to speculate what the long-term effects will actually be. If you are on social media, I’m sure you’ve gotten plenty of information from your Facebook official political and economic expert but let’s save those opinions for cracking open a cold one on the patio. Realistically, no one really knows what is going to happen within the next couple months or more importantly, over the next

review as we continue through other ways of becoming a lucky investor.

Be Aware

Not to beat a dead horse, but by now we have established that luck is created when preparation and opportunity meet. The misunderstanding that often stems from that statement is that the opportunities will just fall into your lap. I won’t say “it will never happen”, but you can feel free to sip tea on the patio and see how long it takes for someone to pull into your driveway with the offer of a lifetime. My guess is that would be worth several troughs of tea. We will continue to discuss different ways to prepare, but let’s pull back on the reigns for a minute (my west Texas origins may be coming through kind of strong with these horse analogies) and understand how to create your own opportunities along the way.

The most obvious area for creating opportunity at this given point in time is within the loaning industry. More specifically, you are at an incredible advantage in this environment as we continue to see the lowest rates in history. Below is a chart that outlines the steady decline we’ve seen in 30 year mortgage rates since the 1980’s.mortgage rate chart.

Based on the timeline shown (1972-2020), the average mortgage interest rate is about 8%. Settling in under 3.5% is literally half of what we have seen historically. In the 80’s we saw massive inflation partnered with unprecedented stock market returns and, you guessed it, unprecedented mortgage rates. The average was over 16% meaning for a $100,000 loan, the borrower would end up paying more than $384,000 in interest over 30 years! The same $100,000 loan in today’s environment of 3.29% would yield only $57,464 over the same term. That’s $326,536 in savings per a hundred thousand loan. Of course, we know that commercial loan rates will vary from residential mortgages and that’s not exactly how amortization calculations work BUT the point is buyers are in prime position right now to be locking in rates that may never come to fruition again! If you are interested in buying real estate but are more worried about watching for the updated COVID-19 statistics than being in touch with lenders, you are not taking advantage of the most available opportunity.

There are plenty of lenders willing to do pre-approvals and give an estimate for the loan terms and rates without committing to moving forward and running credit. We are also witnessing a substantial increase in refinances in the residential and commercial mortgage space. This process is typically much easier than the initial purchase and can have the same effect on cash flow. Overall, lower rates yield lower payments creating an influx of cash flow or requirements for lender satisfaction. You just have to be willing to go out and get your rate!

There is a sensitive topic of conversation when it comes to real estate investing that needs to be addressed when discussing discovering opportunity. Remember the 2010 article quote from the HuffPost in Part I? “After a 27 percent decline in the number of millionaire households in 2008, the ranks of U.S. millionaires swelled to 7.8 million [in 2009]. And it was an even better year to be an “Ultra High Net Worth Individual,” defined as someone with a net worth of $5 million or more. That population grew 17 percent in 2009 to 980,000”. Regardless of the state of the economy, there will always be people who find themselves in financial trouble. Whether it be from poor decision making or being blindsided by an unpredictable circumstance, most are willing to do what they can to overcome and recover as quickly as possible. During a market downturn, that is even more widespread and true. That brings us to our next way to find opportunity. Finding motivated sellers.

Any wholesaler will preach their methods of door knocking homes with grass up to their knees or foraging through overdue tax records, and those are great methods if that is what you are looking for. In a multi-family environment those tactics could be effective as well. There are plenty of “mom and pop” run complexes that have been in the family for years and could have even been inherited by someone who really doesn’t know what they’re doing nor do they care to learn. At that point you are able to review property values and scope the grounds to determine what a respectable offer would be. Feel free to refer back to the section on Investment Analysis from Part I.

 Considering a fair offer, you have the ability to free someone from a property that they never really wanted in the first place. Or, the proceeds from the sale could set them up for a stress free, relaxing retirement. Not to mention the tenants surely have issues and concerns that have gone unaddressed. These types of scenarios don’t occur often, and they’re not always large acquisitions, but the buyer is able to capitalize on a property at a lower than market value while the seller benefits from the sale proceeds and is able to move to the next chapter of their life. It just takes initiative to look for an opportunistic property and track down the owner.

Appraisal district records will typically provide at least the owner’s name and finding contact information from there is as easy as a google stalk,…..I mean google search, away. Worst case scenario, calling or going into the management office directly should provide you information on the ownership of the property and find out the best way to get in touch with them.

In the recent stock market and economic activity, we have not seen as much impact on personal or investment real estate as we did back in 2008. Despairingly, I do not see that being the case throughout the entirety of this crisis. So far in the pandemic, we have seen relatively positive numbers in rent rolls and occupancy, at least in DFW areas. However, being only 45-60 days in general shut down it is possible most buyers and renters have been able to stay afloat due to being essential employees or through government assistance, savings, etc. In other areas that don’t have the economic strength that we see here locally it has been reported that rental payments have not been as consistent. Later in this article I plan to discuss the typical American’s overleveraged debt and underserviced savings accounts, but to reference those issues now is important.

Considering what could happen economically if the situation doesn’t change, people who are not able to work, are not able to make payments. I’m not here to get into a debate of the severity of the COVID-19 pandemic or what regulations should or shouldn’t be in place. All that matters to this topic is the fact that there is a good possibility of single and multi-family property owners being backed into a corner. As previously mentioned, plenty of people may be spending their last savings to stay afloat and as we move into May we will be moving past month 2 of the shut down very quickly. The stock market has had some odd upticks lately, but I would chalk that up to a “dead cat bounce” scenario. Once earnings start getting reported and investors don’t like what they see, there is a strong likelihood the market could drop again.

Overall, I am hoping we’re on the back side of all the issues but that may not be the case. Market drops and insolvent companies are not leading indicators of economic prosperity and job growth. I would never in my life wish struggle or difficulty or hardship on any person. But again, there will always be people in need of a financial bailout so there is nothing wrong with being prepared, finding the opportunity, and helping bail that person(s) out. If a deal can be arranged as a “win-win” scenario there is no shame in jumping at that chance. And let’s be honest, if you don’t hop on the opportunity when it arises someone else will. An owner needing to liquidate assets and stay afloat is the definition of motivated. These types of sellers put those who are prepared at an advantage.

 Again, I am not saying to kick someone while they are down. Sellers who are ready to cash out have no problem with a fair offer, at a discount below market value and will generally feel relieved by the end of the deal. A seller would much rather transact with a buyer who is wanting to make a deal based on the situation but reasonable over a pushy and aggressive scavenger looking to cut the sellers legs out from under them. The point is, opportunities are out there. You will have to be creative, observant and build solid relationships, but they are out there. I know we reviewed the value f relationships during investment analysis, but in finding opportunity they are even more crucial. Brokers, realtors, property managers, owners, all of them will know what is going on behind the curtain of each property before anyone else does. Partnering up with the right people will allow you to get you foot in the door and lock down a deal before it can ever even hit the market.

Opportunity Fund

Now that we have covered how to go find an opportunity, let’s get back to the preparation methods. The opportunity fund idea is one that is universally important to every income generating person. I referred to the current climate of most American’s financial standings earlier and how they are typically overleveraged on debt and underserviced on savings. I have my own theories as to why this is true but it really is a myriad of different things. A large portion of the blame falls on the instant gratification culture we have developed through social media and other relative means of communication. The “I want it now” and “it’s not enough” mentality has run rampant and spreads across multiple generations.

 On the other, less judgmental hand, just the cost of surviving has increased exponentially especially when compared to the increase in general income. Yes, cars and houses are a significantly higher percentage of income spent than what they have been in decades past. But its more than just keeping up with the Joneses. The #1 reason for financial instability and bankruptcy in America is inability to pay medical bills. Individuals and families are caught off guard by unsuspected health issues and the current state of health care and medical insurance (don’t even get me started there) leaves them carrying a majority of that load. Unfortunately, we see that all too often that weight is too much to bear. Obviously, this scenario is not one to be considered an “opportunity” but those situations are also a part of life and should be considered when preparing for the future. I love sports because the lessons learned correlate well to life. One of the best analogies I’ve ever heard goes

“Your offense can put as many points on the board as they want, but if your defense doesn’t hold ground and protect their goal, all the points your team scored won’t matter”. Basically, if you focus all you effort and energy on making money and chasing rate of return but don’t put any protection measurements in place against potential losses, one strike of a loss can wipe out every gain you’ve ever had and prevent you from having gains ever again in the future. Losses can be financial, physical, mental, occupation, it does not matter. Not having strong offense and defensive sides of your team is setting yourself up for failure. That brings us to preparing an opportunity fund.

In Part I we covered a few typical options investors choose to store cash that can be ready to fund real estate when they are. One of the most common for new investors is a self-directed IRA. These accounts allow you to use money within a retirement account to buy real estate (or other assets) and the value of the assets purchased determine the account value of your IRA. I understand the basic premise of this plan but there are some shortfalls. I have always said the “R” in “IRA” stand for restriction. You can’t put too much money in, you can’t take too much out, you can’t invested in prohibited transactions (i.e- invest in your own business) or with disqualified persons (parents, business partners of the plan, etc.), and even though SDIRA companies will preach “tax deferral” (which just means you pay taxes later when assumedly tax rates and your income have increased) SDIRA’s are subject to UBIT taxation (unrelated business income tax). Basically, if you don’t pay 100% cash for a property and decide to rent it out, any income you make off that property is considered “unrelated” and you will have additional UBIT tax on your SDIRA now that is supposed to be tax deferred. So either pay 100% cash for everything (the most inefficient way to purchase anything) or buy real estate but don’t take any profit from it or you’ll be taxed more.

Besides the restrictions, having money in a SDIRA exposed to market volatility that you want to use to purchase real estate is a dangerous game. It is similar in that sense to another alternative to saving liquid assets, brokerage accounts. These are just investment accounts you can buy and sell stocks, bonds, mutual funds, ETF’s, etc. and you are able to have access to the funds quickly by selling out of your positions. These accounts have no tax benefits, you just pay taxes on your gain or deduct your loss every year. It is pretty simple actually. However, like we were discussing with money within a SDIRA, brokerage accounts are exposed to market crashes. Feel free to go back and review Part I to see how the ups and downs of market volatility and the “average rate of return” do not reflect accurately on account values.

 Outside of how they report values, think about a typical scenario. If the market crashes and real estate prices go down (which usually happens with some lag time), most real estate investors want to go buy! The old saying goes, buy low and sell high so we want these assets at their lowest price point. But if your liquid savings are also tied to the market, guess what? Your liquid savings are down in value also and you have less purchasing power. Can you imagine trying to close on a deal in February/March of 2020 with 20% or more loss in your liquid savings? I know of 2 different individuals who had to restructure loans or increase the raise amount and make structural changes just to get a deal to close due to the market crash. Several passive investors had to decrease their contribution amounts or back out. It is a real crisis real people are living right now and needs to be considered.

Another option for liquid savings is to hold money inside a bank account or money market. This solves the problem of being subject to market volatility but creates a whole new issue. Since we came off the gold standard in 1971, inflation has averaged over 3.5%. Not to mention in years following economic struggles, because the government institutes multiple stimulus packages, inflation is typically over 4.5% during those times. Either way, putting money inside a bank account that will earn 0.5% on a good day is literally costing you purchasing power. The typical dilemma for most people wanting to build savings is to invest the money hoping to get growth but sacrificing safety and often, liquidity.

 On the other hand, you can keep the money in a bank where it is considered “safe” and is liquid, but there is no growth element. I want to pause and acknowledge something for a moment. Just because investments are volatile (including real estate) and bank accounts don’t earn anything, does not mean they are bad accounts. Said another way, don’t try to use a hammer to cut a piece a wood in half and then get mad at the hammer when it doesn’t work. All financial accounts are created to perform a specific job but when they are misused, problems arise. An ideal opportunity fund would allow you to save money into an account on a regular basis that is guaranteed to grow and outpace inflation, be completely safe and protected from creditors or predators (people looking to sue), immediately liquid when needed, grow tax free and has no correlation to the market. This type of system allows savers to fill the gap between investments and bank holdings to create a middle ground of leverage. All of these characteristics are why I use the Infinite Banking Concept. You may or may not be familiar with this strategy, but it is very prominent in real estate investing.

Obviously for all of the reasons already listed, but also because I can borrow money from my own account to invest in real estate while I still continue to earn interest on that same money within the account. Its called increasing leverage through positive arbitrage. Its what banks do every day, this system just allows you to create your own bank. This article is not targeted at covering this strategy specifically and there is much more detail than just these few sentences that go into utilizing IBC correctly, but the point is saving into an opportunity fund correctly prepares your liquid savings to capitalize at the right time. Or as we say in west Texas, “get in while the gettin’ is good”.

Again, opportunity funds are a vital piece to real estate investing and being prepared to take advantage of opportunities, but this practice should be adopted by every responsible, income generating person. There is no way to tell what curveballs life is going to throw, and while I do not consider myself to be old just yet, I have already had my fair share of unpleasant surprises as have many of our readers. Although predicting the future is impossible, preparing an acceptable defensive strategy to an overall financial plan is not only simple, but crucial.

Don’t Get Stuck in a Rut

I have no shame in admitting I am a creature of habit. Most humans are. We thrive on structure, routine and knowing what is to come. Sure, having some excitement along the way is nice but, generally speaking, it is preferred to have a system in place that flows smoothly. However, this type of mentality within real estate investing can cause amazing opportunities to be overlooked. There are those that are so incredibly focused on the most specific of assets that they miss out on others that would easily reap more benefit. Having a specific “if it isn’t a 150-200 unit complex within the Dallas or Tarrant county with a pitched roof, brick exterior and over 70% occupancy I’m walking away” structure is not necessarily a bad thing.

 But that 125 unit with vinyl siding and 85% occupancy with undervalued rents could slip through your fingers. But real estate investing isn’t even always about multi-family. There are so many areas and ways to invest actively or passively, that all have their own benefits during certain time periods. Don’t be so afraid of something new that you miss a grand and blatant opportunity. Just like in traditional investing, having a diversified portfolio is recommended and can help offset fluctuations. Be aware of other options and take them into consideration if their model fits your goals.

 DFW is an incredible area and from what I have seen, seems to weather economic storms rather well. Although there are still troubled times just like anywhere else, it is diverse and large, with multiple core companies and industries to provide jobs. This is why so many people have flooded this area over the last 10 years and the multi-family projects have produced phenomenally. While there are still great deals out there and cash flow can still be created, the 10-12% cash on cash once promised to investors regularly is starting and will continue to steadily decrease to more nominal numbers. With the “red waters” we see throughout the metroplex, prices are being driven up and CoC is being reduced. There are investors that are comfortable in this area and feel safe with the environment of DFW multi-family and will continue to invest with 7-9% cash on cash returns and that is totally fine.

That is why we see so many California syndications outbidding on properties in DFW. They know 7-9% is a reasonable return to expect. These investors are not focused on massive “pops” within 3-5 years but on reliable, consistent cash flow with some appreciation on the back side. This is a great model and works smoothly for many experienced people. For those that are looking for double digit cash on cash returns and large IRR’s at the sale, it may be time to start venturing elsewhere.

Considerations of other upcoming areas with new developments, opportunities for large companies and job growth will begin to point trail blazers in a new direction. Now to look back on the investment analysis topic, a thorough market analysis is more than necessary to begin a sniff test on any property in an unfamiliar location. Neal Bawa has amazing tools that many active investors I know use to decide whether to move forward in a new market or not. Being able to find a new frontier is an incredible advantage for those who are willing to get out of their own backyard, do some research and prepare accordingly.

Being aware of other investment options means also being willing to look outside of traditional single and multi-family investments. Mobile home parks have been drawing interest and pose unique opportunity and different, maybe even less risk exposure. I do not have any investments in mobile home parks but have spoken to many active mobile home park investors who eventually left multi-family completely to focus all their attention to this new area. For some reason, my husband has a new infatuation with storage buildings. Oddly enough, over the last 7-8 months I have come into contact with multiple specialists in the storage building space.

Reportedly they have low overhead and turnover, fewer maintenance requirements and liability while maintaining consistent cash flow. We already discussed how people like to overspend so all that stuff they buy has to go somewhere! My mother personally has had 2 storage units for over 5 years. My sister has a storage unit and an RV storage space for her work bus. I hate to admit it, but my husband and I share a storage unit with his parents. These types of investments require different underwriting and operation management but when done correctly, can be surprisingly lucrative.

 I know most in the multi-family space are focused on forced appreciation in the B/C class properties and tend to leave new development and A class for the hedge funds. But there is more need for development than just multi-family. New builds in the single family home industry have been underserviced for years due to so many focusing on apartment complexes. Now, with interest rates being at an all time low, homeowners could be looking to refinance, but many are taking this opportunity to buy a newer home. I am actively involved with single family development here in the DFW area. We previously discussed the need for relationships when analyzing a real estate investment, and development is no different.

 Ironically, I consider myself lucky to have met and connected with the people I’m partnered with on this venture. We have ears to the ground in order to find land available for purchase and development. Our relationship with an experienced builder allows our investors to purchase land and build homes between $99-$100/sq foot. These homes are in the “sweet spot” range of 2400-2900sq ft. and are currently being listed in the development we just finished at $159/sq ft. The realtor branch is specialized in marketing developments and willing to negotiate for lower fees due to selling in larger volume. I utilize this investment for myself and my investors as a passive way to invest money on a short term basis (typically 6-9 month turnover). And because these new development investments require significantly less capital, many who are interested in multi-family but are unable to purchase a full share just yet, are able to use the short term turnaround as a springboard to their savings. This is an example of utilizing different investment types within real estate to work in concert with one another.

If you could not tell by now, the common theme for this message is to prepare your finances, properties and your mindset correctly and when an opportunity opens the door, you’ll be the luckiest son-of-a-biscuit around. Be aware of the impact market volatility can have on your assets. Analyze your potential investments responsibly and accurately. Don’t be afraid to observe the environment around you and find new opportunities instead of waiting for them to come to you. Prepare a protected opportunity fund to be ready when the market drops. And be wiling to investigate other real estate routes that are complimentary to your current portfolio. Of course there are always minor details in the middle of all these elements but control what you can control, expect the best and prepare for the worst. Success will find you.

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