Mike’s Apartment Blog

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A business plan for investing?  You betcha!

Newsflash – investing IS a business.  It has customers, suppliers, and provides a service/product.  Even trading stocks on the NYSE, you buy shares from people who are selling (vendors), sell to people who are buying (customers), and are trading shares in companies (product).  The more time you take to understand all these things, the greater your chance of success is.

It’s not about the actual plan that is written down on paper, that is just the end product.  All the data that goes in there about competition, marketplace, customer desires, and suppliers mindsets are the valuable things.  It helps prepare you and educate you before you drop even one dollar into the market.  This preparation greatly increases your chance of success.

A business plan also helps keep you focused.  When you start to get off track, or find yourself looking at other potential avenues, refer to your business plan.  Is it part of the plan?  No?  Stick to the plan!  If it has been working well so far, stick to it.  If you still think its worth taking the risk to go after another avenue, fine, write it into your business plan first.  This will ensure you have done all the proper research prior to taking on additional risk.

I write business plans, not only for my various businesses, but also for every apartment we purchase (yes, apartments are businesses too).  It greatly increases your chance for success.

Every cloud has a silver lining and every problem is really an opportunity.  That could not be more true when looking at our economy.

When the economy is in a depression, a dollar gets you more.  People drop their prices to make a sale, retailers get desperate, and overall business goals go from maximizing margin to just simply surviving.  That is where we are and why you get more for your money these days.

Case in point: we had a move out in a rental unit and have decided that instead of installing carpet, we will do tile.  I was amazed at prices for tile these days.  First, you can get quality materials for a very low price.  Second, you can get quality installation service for cost.  At this point, it’s cheaper than having your maintenance team do it and looks more professional.  You cannot beat that!

At this point, you can get a full job for $3/sqft which includes demo (removal of old carpet and pad), floor prep, installation, and clean up.  There really isnt a better deal out there that I have ever heard of (even in the past).

So keep in mind, when a problem shows up (especially a wide spread problem) think about how you can turn it into an opportunity.  This is the core of entreprenuerial ideals.

Today was Memorial Day, a U.S. holiday in which we remember those who died in service of the military.  This is commonly done through large cookouts where friends, family and neighbors get together to socialize and hang out.

Why do I bring this up and how does it fit in with apartment investing?  I love cookouts and having them at apartment buildings.  People alway appreciate free food and you would be surprised how many people show up.  Funny thing is they are a great way to get to know your residents.  Find out how long folks are staying in the area, when they plan on moving, if they will need a bigger place soon, a smaller place.  Residents also tend to bring their friends and family – an excellent way to get referrals for your vacant units.

We have finally fixed all the leaks in our first building.  If you remember, we were rehabbing Cirese Court in two phases of three months per phase.  We encountered major plumbing problems in the first building which put us over the budget and timeline.  We have fixed those and are now on track to having the building half leased by the beginning of the month.

This project has been coming along well and is in an area where we either have close connections with the other landlords or we own the neighboring real estate.

If you have been following the news and the state of the U.S. government these past couple decades, you know our social security system is on a collision course with bankruptcy.  How did this happen?  Pretty simple… our social security system is like an insurance company.  It gets paid premiums today which it will pay back to you later in life.  The problem is it’s run like most government operations where it spends more than it takes in.

The stress this puts on the social security system is increasing.  Unless something changes, very soon the stress will become too great and it will collapse.  Once this happens, those currently relying on social security will become destitute and those who are expecting social security as a means to retire will be out of luck.

The only answer is to take charge of your own retirement.  Decide when you want to retire and how much you will need to be comfortable and start executing that plan.  We are experiencing one of the largest transfers of wealth in the history of the United States, don’t get caught on the wrong side of that transfer!

A lot of folks ask what the benefit of pooled investments are.  First, you need to understand what a pooled investment is.  A pooled investment is when people pool their resources.  Resources are more than just money – expertise, time, materials are all just as valuable.

A typical pooled investment for Cabal Investments is structured like a joint venture.  One side brings in the investment, expertise, and the plan while the other half bring the resources.  In short, one group bring the money and the other group does all the work.  Then you split any profits.

Here are important things many fail to consider before putting resources into any pooled investment:

1. Do you trust the people you are investing with?  If you don’t trust that the team you are investing with will take care of your funds like they would take care of their own, steer clear.  I cannot stress how important it is to avoid anyone you distrust.  Don’t let greed and a beautiful presentation sway your decision if you dont have trust.
2. How focused is the company you are investing with?  I have seen companies who started out as house flippers turn into gold mine investing.  I have seen internet merchandising folks turn into hedge funds.  All these folks lack focus.  They are going with whatever is hot at the time.  I agree that you need to be aware of the trends, but if you keep changing your focus you can never perfect it.
3. What is the compensation structure for the management team?  You want to make sure that most of the compensation is tied to success of the project.  Ie. management gets paid when the investors get paid.  Obviously a little compensation should be allowed up front to keep the lights on, but make sure that the success of the project is what drives the management team’s side of the deal.

If you are in the corporate world, you have probably heard this, “Manage your manager.”  Its somewhat cliche, and in that case, it means make sure your manager knows what you need from him.

Its very similar in the apartment world.  Managing you manager in apartment investing means make sure you are keeping him focused on the most important issues.  Stay in constant contact, make it clear what the most important issues are, and most importantly give goals and expectations of what you want done.

This ensures your manager is working on the things important to YOU and not whats important you HIM.  Most good managers are stretched pretty far on what they do, you want to make sure you and your building remain in the forefront of their thoughts.

One of our projects, Cirese Court, is a small building being rehabbed for rentals.  For the most part it is going well, we replaced some of the cracked window glass, the damaged walls, and some fixtures.  We took a small gamble during our walk through and thought it might not be necessary to replace the plumbing as it appeared solid.  Boy were we wrong…

by Off beat Mum on Flickr

Today was the first day we were able to turn the water on to the building.  We connected the cold lines only to test the existing plumbing.  Leaks ALL OVER.  Lots of cracks and pin hole leaks throughout the piping has comprimised the entire mechanical system.  What a shame, but not totally unexpected.

We will open those walls up and replace the existing copper, iron, and galvanized piping with PEX.  PEX is a great material that withstands freezing, cracking, and melting.  It’s cheap and does not attract scavengers who would trench your walls and steal it for scrap.  Just great stuff.  Unfortunately it did not exist back in the 1920’s, so we have what we have – a bunch of leaks.

Overall it will cost us around $400/unit to fix and will put us slightly out of budget.  A disappointment for sure, but not unexpected.  Should push us our completion date out by 2 weeks.

We our biweekly mastermind call this last weekend.  I like these calls because it keeps me moving forward.

One valuable thing I learned was balance.  For those entreprenuers and hard working folks out there, it is easy to let work take us over.  To absorb all your free time and brain cycles.  This is an addiction, plain and simple.  Like any addiction, it is unhealthy.  Any time you focus on one thing in your life to the point you neglect all other aspects, it is unhealthy.

I realized I often neglect my social life and relationships.  Because of this, I set specific goals.  I happen to be married, so I set specific goals to spend time with my family, pets, and housework.  I find that spending time strengthening these relationships helps me continue to move forward in other areas of life.

Don’t forget why we are all out here and working our butts off.  Without our health and our loved ones, financial success is a hollow victory.

Came across a very good, though simplified, explanation of derivates and how our economy melted down.  Found this off a forum site I frequent to discuss investing with thousands of other investors.  This particular story was a comment posted by buddiee18 off Yahoo! Finance.

An Easily Understandable Explanation of Derivative Markets:

Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit .

By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

Why is it that things always make more sense when alcohol is involved?