Strategy

I recently have been reminded of something a friend of mine told me years ago; however, it didn't make an impression on me until just a few days ago. I can't quote him exactly, but what he basically said was . . . "It is not how much you take in, but how much you take home."

A business is never sitting still. They are living breathing things, that are either growing or dieing. However, a business should not grow at the expense of making money. For instance a business that brings in $1 Million per year in revenue that translates to $200,000 per year in net profit is MUCH better than a business that brings in $10 Million per year in revenue and also has $200,000 in net profit.

The lesson: As you scale your business, make sure your not just doing more work to bring home the same amount of money.

Real Estate Prices in Birmingham

Real estate prices in the Birmingham metro area have climbed by an average of $20K over the last 6 months. What could be causing this? I believe three things:

1. Lack of inventory - Soon 6 months worth of foreclosures that were postponed due to the foreclosure moratorium will hit the market.
2. $8K tax credit - As much as I hate to say it, the tax credit seems to be moving some houses.
3. Seasonal spike - People, home sales spike EVERY year around this time.

Watch out for falling prices.

Section 8 Article in Birmingham News

Interesting article today's Birmingham News about the Birmingham Housing Authority. You can read it for yourself here:

http://www.al.com/news/birminghamnews/metro.ssf?/base/news/1247559344314050.xml&coll=2

It doesn't tell you too much about how these new payment standards are going to work. I'll keep you updated as I find out information.

MW

What Happened?!?

As lending continues to tighten, the opportunities to capitalize continue to increase in the single-family sector of Birmingham real estate. I was recently on a phone call with a potential investor and we discussed the fact that as the real estate market continues to worsen and as the ability to find financing continues to get harder and harder it really weeds out a tremendous amount of competition. Therefore, those with money, or those that have access to money, currently have a competitive advantage. It is almost like the “Perfect Storm” for those that have money and a good management company . . . as deals begin to flow in from the 6 month foreclosure moratorium. Stay tuned; like the famous saying goes, “Some will make it happen, some will watch it happen and some will wonder what happened.” I’d suggest now is the time to make it happen. I just don’t want to look back two years from now and say, “I wish I’d worked harder and bought more.” I don’t plan on that happening.

If you have the cash, but need some guidance, team up with someone . . . I’d love to help!

Beware . . . Foreclosure Tsunami

What does 6 months of deferred foreclosures look like? We are about to find out. From October of last year until April of this year, our administration placed a moratorium on foreclosures. Now in their infinite wisdom, we have thousands of foreclosures that will hit the market here in Birmingham. Who is prepared for it? At Golden Key we have been building the only Ark we know of that we believe will float the middle market of single family homes. We are looking for partners who would like to leverage what we have learned over the last five years and the platform we have built for purchasing houses. Someone will profit from the oncoming challenge ahead. Will it be you?

Golden Key

Check out our piece we just created using SlideShare:

Golden Key

View more Microsoft Word documents from Matthew Whitaker.

Problems = Opportunity

“The greatest problems present the greatest opportunities.” – Tina Seelig, Stanford University

A new foreclosure starts every 13 seconds . . . that equals out to 6,500 per day, according to the Center for Responsible Lending.

I was listening to a podcast on my IPod today when Tina Seelig from Stanford University, who teaches entrepreneurship, made the first statement. It reminded me of how BIG the housing problem really is (13 seconds). If that is true, then we must believe there is equally as BIG of an opportunity for people to take advantage of the problem. I believe it is unfortunate that people have been foreclosed on over the past three years, when they never should have been given a loan in the first place. However, out of the folly of the banks, we ought to take advantage of the abundant opportunity they created.

All real estate investors I trust tell me “cash flow” is one of the two most important items when determining whether a property is a good investment or a risky investment. How many of us were caught up in speculative type real estate investments where cash flow wasn’t even a consideration?? Can someone say, “beach condo?” Now all of us can see how stupid that was. An investment, that doesn’t yield cash flow, ultimately has a value of zero, unless you can find someone else to sell it to. I can find better ways to lose money!

Come invest along side us at Golden Key. We provide BOTH of the key indicators of a good real estate investment. Want to know what the second one is? Give me a call or shoot me an email @ matthew@gkhouses.com.

Leveraging Real Estate, Risk vs. Reward

As the credit markets continue their roller coaster, with guidelines and rates changing daily, it makes me wonder, "What does the future hold for real estate investors and their ability to secure funds to continue investing?" For people like me whose livelihood depends on real estate in the Birmingham area, seems to be a question that needs to be answered! Thinking about these things, brought me to the risks versus rewards when using debt to buy houses. Most people understand that debt allows for the possibility of higher returns (all other things being equal). But is that ALWAYS true? Let me give you an example out of our Golden Key Marketing Piece that I think is really helpful:

Let's use basic assumptions with our operating expenses . . . taxes, insurance, projected maintenance, management, and a vacancy/credit allowance. All this is assumed for us and lumped into one number. On the leveraged return, lets assume we can secure debt that meets the following criteria . . . 20 year amortizing loan, 7.5% interest rate, 20% down payment.

To make this a simple example, lets just work from the Year 1 return (we are going to examine only the returns for the first year we own the assets.) Using the "Ten House Package" example from our marketing piece, our "Projected Net Operating Income (NOI)" is $41, 934. NOI is calculated by subtracting "Potential Rental Income" less the above "Operating Expenses" Once we have NOI, we can use some simple math to find out our unleveraged return (this is also commonly referred to as "cap rate.") In our marketing piece the sales price for the particular package we are discussing is $400,000. If we take the NOI and divide it by the sales price, this gives us our projected return without leverage. In this example, the return is 10.48%.

Example #1 - Unleveraged:

$41,934 / $400,000 = 10.48%

For a leveraged return, we take the above assumptions for the debt and apply it to the package (i.e 20% down payment = $80,000). To get a projected return using debt (also can be called "Cash + Principal on Cash Return") you take the cash flow (cash left over after all operating expenses and mortgage notes have been paid) which is $10,999. You then add this to the total amount of debt you pay down $7,178 (do not include interest, just principal) and divide it by the total cash invested, which is $80,000. If you do all this, you get a projected return of 22.72%, obviously much higher than the unleveraged example.

Example #2 - Leveraged:

($10,999 + $7,178) / $80,000 = 22.72%

While it may appear that leveraged real estate is ALWAYS the way to go, let me point out that this isn't entirely true. What happens if, instead of a 7.5% interest rate, the best we can find is a 15% interest rate? Let's keep all the other assumptions the same and look at the projections again:

The unleveraged investor will not see any change in his/her returns. It is pretty obvious that if you use NO debt and the price to borrow money changes, it doesn't affect you!

Example #1 - Unleveraged (@ 15% interest):

$41,934 / $400,000 = 10.48%

As for the leveraged investor, the new projected cash flow decreases to -$8,631. That takes our projection from +22.72% in the above example to a whopping -7.35%. You actually lose money every year. You can make more money sitting at home watching Days of our Lives.

Example #2 - Leveraged (@ 15% interest):

(-8,631+ $2,748) / $80,000 = -7.35%

As you can see, leveraged real estate isn't always better. New investors commonly assume that leverage ALWAYS equals higher returns. That is why it is important to understand the risks and rewards when evaluating an investment on the front end . . . BEFORE you purchase it. Also understand that debt can fluctuate while you own the house (depending on you loan) and you must be prepared for these fluctuations.

If you'd like to discuss the matter further, post a comment. If you would like one of our marketing pieces that discusses purchasing investment houses in Birmingham, Alabama, email me at matthew@gkhouses.com.

Have a great day!

New Legislation Benefits Landlords

As Birmingham landlords, we received some exciting news this week. Two bills passed the state legislature that make owning rental property more desireable. The first is something we have been seeking for a long time. According to an update from the Alabama Association of Realtors the new bill, " . . . decrees that (landlords) are NOT responsible for unpaid utilities in the tenant names and further, cannot interfere with the landlord's contractual relationship with utilities." Sounds like common sense. However for years landlords in Jefferson County have been forced to pay for tenant's unpaid utility bills. Utility companies were even going as far as filing liens against the property. Imagine the money we will save!

Additionally, the state legislature, passed measures to, " . . . expand certain rights of the landlord and shorten the eviction process" (again according to the AAR). Unfortunately for dead beat tenants, they will no longer be able to drag out evictions for months and months.

A big thank you to the AAR and the Alabama State Legislature for passing these two common sense bills!

Golden Key Investment Property

I'm really excited about starting this blog. I hope it will be an informative way for you to stay connected with investment property in the Birmingham area. I've personally been buying property in Birmingham for 4 1/2 years now. I've bought almost 120 houses in that time. We sell property to investors from all over the country who are looking for a way to diversify their investment portfolios with real estate.



I'm also excited about hearing your comments and feedback as we go along. I hope this will be a way for "like-minded" investors to connect and share ideas from all over the country.



Thanks so much for visiting the Golden Key Blog!