The Commercial Real Estate HandBlog

Questions To Ask Your Financial Planner…..

Rob Powell — Wed, 11 Nov 2009 22:34:10 +0000

The Real Wealth Expert Panel

Greetings from the metropolis of Cedar Crest, NM!

Today’s post comes from a question from a friend of mine. It is a detour from real estate, but like most of us, we have investments in different types of vehicles….stocks and mutual funds for example. So…I thought this may be helpful for some of you…..

Rob, I have a meeting with my financial planner next Tuesday. I primarily invest in mutual funds and stocks. My portfolio has dwindled buy 50%. I would like to know what questions I should ask my financial planner in order to right the ship.

I took the question to my good friends Emily and Steve….you can read both of their replies below….

There is a lot of information here….so feel free to print out…..

Response from Emily:

Hi Rob,

Emily Cressey Real Estate Investor and Coach

I think it’s a great question, and I would be glad to weigh in with some thoughts.

There’s nothing like suffering a down market to make you stop and re-evaluate your investment strategy.

However, a down or volatile market is rarely the best time to sell off mutual funds. These are the days to stick to your strategy and dollar-cost-average your way into the market while prices are low. (As I write this, I don’t think the market is particularly low or undervalued, I’m just speaking in general about when the market is “down.”)

Most mutual fund investors invest for the long term with the assumption that the market will go up approximately 11% a year on average. However, with the current political climate and anticipated changes in increased government spending and government debt, as well as the potential government-takeover of the private medical sector, I think it’s reasonable to question these underlying assumptions, and hedge your bets a bit in case the next 100 years in the stock market don’t perform as well as the prior 80 years have.

One of the biggest things to look at is your asset allocation.

Within the stock market, you may have created some diversity. Personally I invest in the following funds:

S&P 500 – 35% of portfolio

Small and Midcap Index Fund – 35% of Portfolio

Total International Fund: 25%

REITS: 5%

I don’t have a larger share of REITS because I have real estate investments outside of my stock investments.

I am more heavily invested internationally now than I have been in the past due to concerns about the future of the US economy.

I hold no bonds because their primary purpose in a securities portfolio is generally to provide stability – at the cost of lower returns. I am young enough that I don’t seek security in my portfolio at this time. I am chasing the higher returns. This may change as I get nearer to the age at which I plan to start pulling money out of the portfolio or living off its returns.

I do have about 5-10% of my investable assests available as liquid cash reserves that are available to invest in various things including real estate or stock should an excellent opportunity present itself. This also lends some stability to the portfolio should something terrible happen.

In addition, I keep a 6-month emergency reserve for my family, separate savings accounts to save up for things like furniture or a new car, and operating capital for my businesses in case a rental property goes vacant or I need to do a repair on a house, pay my accountant, etc.

I think as far as questions to ask your financial planner go, I would focus on evaluating your overall portfolio strategy at this time to see if it still meets your needs. Do you have the cash reserves, the portfolio-stabilizing bonds and cash, and the life insurance and operating capital you need to meet your needs? Are you comfortable with the overall risk and return of the assets you are holding? Do you need to re-balance anything? And finally are there other asset classes that it makes sense for you to diversify into… real estate you own and operate, businesses, private mortgages, gold, etc. My parents says their best-performing asset last year was a loan they made to me. Personally, my cash-flow real estate is doing well, it’s always nice to get checks in the mail!

There are lots of ways to invest – but they are not all “easy” things for your financial planner to sell. If you are willing to put the time into other types of investments, start with some books at the library (Or this blog, if it’s commercial real estate), and find out what people do who are successful with those investments, and what the risks are, as well as the ramp-up-time.

A lot of people are risk-tolerant on paper, but then when there is a shake-up, they have trouble staying the course. It’s no fun to lose a million bucks just because the stock market has a bad day.

If you’re not comfortable with the losses you’ve taken, don’t just “Sell” to stabilize things, but look toward starting to buy some different asset classes that will create a more stable base for your net worth.

Also, remember to see what you need to do for your different goals – saving for kids college is a much different time line and should have a different strategy than saving for retirement.

I invest for retirement and my son’s college separately. Our goal is 20% of our income going into retirement savings. After we’ve covered that, our extra savings goes into paying down our mortgage. Currently we’re not putting any more money into real estate at the moment, because it already represents a significant chunk of our assets, and we’re trying to diversify a bit to spread out the risk and return. The nice thing about paying down debt is that you get an immediate, guaranteed, tax-free return!

Well, that was long-winded, but it hopefully will give you some good things to think about.

The challenge about financial planning in the abstract is that there is so much that is about YOU, and your situation, and not just “What the book says.” I think you’ll have a great conversation with your financial advisor, and please let us know if you have any further questions!

Response from Steve:

Rob,

Before I give my answer to your friend’s question, I’m going to answer a that wasn’t
asked but that I believe is very relevant …

“How can I optimally work with any advisors”?

I strongly believe in and use advisors myself (attorneys, book-keepers,
CPA’s, physical training, financial mentoring, business mentoring and have
in the past used financial planners for years).

I believe three of the most significant keys to the effectiveness of your
advisors are:

1. Are my advisors really advising me for my best interest?
Are they teaching me HOW to think about things or just saying “do this”?
You of course have to expect and ask for this as often people want to take
the easy way out and just have someone tell them what they need to do. For
example I really like my Iron-Man triathlon coach … except she doesn’t
really want to explain WHY we’re doing certain things.

2. Is my advisor actually DOING what’s being advised or are they simply
making money from giving the “advice”?
This is especially true in the area of financial planners, many of whom are
doing poor financially themselves. This is why I’m following my passion of
teaching/coaching others as their “personal CFO” … to teach them HOW to
think financially what’s best for them.

3. And lastly and this is an important one … The quality of my advisor
depends on ME and the questions I ask.
While I greatly appreciate the advisors I use, the quality of the questions
I ask makes a big difference. For example notice the difference with the
following two questions about the same topic.

“Should I invest in this opportunity”?

“What should I think about before I choose to invest in this opportunity,
and what are the risks I should consider before doing so? How CAN I
optimally make this investment”?

For example if I was asked the 2nd question I might reply with the following
helping you think through the following.

“It depends” … What upside do you see (is it worth considering assuming
this works out as planned and will you do this type of investment again …
if not why bother looking further? Let’s review the risks associated with
this type of investment. (NOTE this may heavily depend upon YOU … for
example since I invest in cash-flow apartment complexes I view them as safe,
while I’m no longer involved with stocks and thus for me they’re more risky.
WHATEVER type of investment you choose you should at least understand the
basics of them (see attachment). Many people invest in mutual funds which
are very easy but not many know that if you purchase towards the end of the
year you’ll likely be charged taxes as though you’d owned the fund all year.
As you grow as an investor you’ll learn to ask better questions and hence
get better answers. You do NOT need to know all the details but at least
how the basics work. ASK your advisor to explain them to you.

Some suggested questions first for YOU (not your advisor):

1. What is the goal of this investment (i.e. have enough money in 10
years for most of my daughters college education)?

2. Do I understand the “basics” of how stock and mutual fund
investing    works? If not you may want to read “Take on the Street -
What Wall    Street and Corporate America Don’t Want You to Know & What
you Can Do    to Fight Back” – Arther Levitt, former chairman of SEC. I
am NOT    saying you shouldn’t invest in stocks or mutual funds … I did for
years and others are still doing it successfully. I have more of a    bias
for real estate as I have advantages there vs. the stock market
where I don’t. I would recommend you learn about options, puts, and
calls which can protect you if you’re investing in the market vs. the
advice “just invest for the long term” … which by the way mutual    fund
companies don’t do (i.e. their turnover ratio is often greater    than 1 where
they sell every stock in the fund at least once a year).

OK, so I’m a little long winded and as you can see I have an opinion on
this, let’s get back to the “original question”

Questions for your financial planner?

1. How are you compensated from my investments?
* Is it a flat fee (i.e. % of your $’s invested) or commission / loads on
your investments? For example in the insurance world brokers receive a
larger commission for selling more expensive “whole life” policies vs. term.
It helps to understand any potential biases.
* There are some great financial planners and some really do know about the
stock market, but interestingly enough last I heard about 80% of the index
funds (such as S&P 500 index) outperform the actively managed funds with
much higher fees. If my portfolio over time isn’t doing better than “the
market” … such as S&P 500) maybe I should just invest myself in low cost
index funds, and then as needed pay an advisor (maybe for services rendered
or by the hour) for advice. Again, I DO recommend advisors but in the right
context.

2. What changes would you suggest, and why?
KEY follow-up question – “will you guarantee that”? In most cases the
answer will be “no, of course I can’t guarantee that stocks on average
return 12%”. The reason I mention this is to learn to recognize someone’s
opinion vs. fact. You can’t always get facts but often opinions are
presented as fact

Thanks Steve and Emily….

Until next time…..rob

Technorati Tags: economy, Emily Cressey, financial plan, financial planning, financial questions, investing, investment, investor, rob powell, Steve Maxwell, TheRealWealthBlog.com

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Commercial Real Estate Investing: We Made Technorati.com’s Top 100 Real Estate Site!

Rob Powell — Tue, 10 Nov 2009 19:53:48 +0000

The Real Wealth Blog makes Technorati’s Top 100 Real Estate Sites…at least today it did. Great news for us. What does it really mean? Well…that our following is growing….at least I think. How long will we be there? Hmmm? Are we still there?

So….A big thank you to all of you for reading and following us here at the www.TheRealWealthBlog.com

Keep on a look out for our new “Community” site where all our resources are free. No joke!

Until next time…..rob

Technorati Tags: commercial real estate, Community, Real Estate Investing, RealWealthBlog.com, rob powell, Technorati, Tecnorati, TheRealWealthBlog

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Real Estate: The Time To Buy?

Rob Powell — Tue, 10 Nov 2009 04:59:05 +0000

Hanging with friends and yes...real estate

Greetings from Washington D.C. Yes….I am still here.

Today I spent time with some friends who used to live in New Mexico and now live in the D.C. area. I also met up with an old high school friend. It was great to connect….but the realization of how I let time slip by since I last talked with my friends was fast hitting.

It had been twenty years since I saw my high school friend Israel. I hope it is not that long when I see him again.

But….I digress….

So….

There is a lot of talk that things are getting better with regards to the economic state of our great country. Well…I do not agree. We are getting ready to see another wave of sucker punches…but this time from the commercial real estate sector. Yes….it is true….commercial real estate is going to hit our economy hard. The question is…. how hard? With government money trying to soften the blow, it may not be as hard as I previously thought…BUT…with the government printing money at record levels, there will be a price to pay. The question is….when is that price going to be paid? My thought? …..soon.

High School buddy... Israel

None-the-less….lender’s books are filling up with Commercial REOs. Commercial assets at discounted prices are showing up by the truck loads….So….it is cherry picking time. BUT one huge problem. Lenders are not lending. Well….at least not without a heavy down payment. Up to 50% on some deals….especially retail…office….industrial. Apartments still fair better than other commercial real estate…but even that sector is feeling the pinch. Have you tried to fund a small apartment complex lately? Seems like only the 2M and above are getting funded these days and that is in only certain areas of the country.

But….there are a few solutions out there as funding gets tough. I am seeing more and more seller financing as well as reasonable terms on private money.

So…yes…it is a buyer’s market….but building those relationships outside of lending institutions will give you great buying power in one of the best times to buy commercial real estate.

Until next time……rob

Technorati Tags: Apartments, buy commercial real estate, commercial assets, commercial real estate, D.C., New Mexico, real estate sector, REO, REOs, rob powell, seller financing, small apartment, TheRealWealthBlog.com, Washington

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Real Estate Investing – Your Biggest Investing Enemy?…..Emotion.

Rob Powell — Mon, 02 Nov 2009 21:50:20 +0000

Washington D.C. in the fall

Greetings from Washington, DC. One of my favorite cities…..if not my favorite city. I’d have to think about it.

As funny or odd as this may sound, Washington D.C. is a very romantic city. There are so many positive emotions that bubble up that I think the word “romantic” is fitting. But…not a place for a honeymoon….but then…what do I know.

Today….We spent a lot of time at the Smithsonian Art Museum. Just amazing. I have never been more captivated by art. Living in New Mexico….the art galleries are endless…from Santa Fe to Taos. Walking from art gallery to art gallary in New Mexico is great….but nothing like here in D.C.

So…as we made our way through all the exhibits at the Smithsonian….one painting captivated me….Repose by John Singer Sargent. A girl….lounging on a couch. You can tell this lady is deep in thought….possibly sad. I wondered for a long while what was she sad about?…what was she thinking about? I came up with my on conclusion….but I digress.

Repose by John Singer Sargent

Anyway….

Getting caught up in all the amazing emotions touring D.C. reminded me of how dangerous emotions really are. We all are familiar with emotions when it comes to relationships. The old saying “love is blind” is a great example. Well…guess what, emotions are dangerous in business as well.

I remember as a “newbie” investor how wrapped up I would get in a deal…..to the point where blindness would set in. Getting emotional over a deal is a great way to cloud your vision. All of a sudden you are compromising….or worse….justifying.

Think of it in terms of personal relationship. Before you start dating someone, you have criteria….then all of a sudden you fall in love and the criteria goes out the window…all in the name of “love.” All of a sudden the things that you would not compromise on become “cute” or “no big deal.”

Well…in a personal relationship….the relationship ends in heartbreak. But in business….the results could be financially devastating.

So….

Here are a few ways to avoid getting emotionally involved in a real estate deal.

1) “Fall in love with the numbers first.” This is probably the most crucial tip. Focus on the numbers first! Knowing how to analyze a deal and understanding the numbers is crucial. Letting the numbers dictate your next action is a great rule of thumb.

2) Use the facts. Real numbers should be your focus. Proforma numbers are “hopeful” numbers. Never use proforma numbers in your initial analysis. Yes…proforma numbers have their place in the big picture of things….but not when you are trying to understand the asset. Proforma numbers only help you fall in love with the property…which is a bad move. By the way…come up with your own proforma numbers. Never…ever…ever use a real esate agents or seller’s proforma numbers.

3) Try not to visit the property until you have fallen in love with the numbers. You may be tempted to go visit the property….but…this may only impact you emotionally.

4) Have someone else look at the numbers too! Having a third party look at the financials will give you a different perspective as well as help you stay focused on the numbers.

5) Write down your investing criteria and stick to it. In other words, write your plan…work your plan!

Of course…there is a lot more to this but the tips above should give you good start in the right direction.

Until next time…..rob

Technorati Tags: investing, john singer sargent, Real Estate Investing, rob powell, smithsonian art museum

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Tips for Choosing a Property Management Company

Rob Powell — Mon, 19 Oct 2009 23:31:53 +0000

Me and Jesus....well...not really...at Compassion International in Colorado Springs

Greetings from Santa Barbra, CA….. rainy and gloomy….but the hope for sun tomorrow.

Anyway….

Here in CA to rub shoulders with the folks of Yardi Software and to checkout the sites. The rain has not stopped me….

Before I arrived in CA….I was in Colorado visiting my mentor Wes Roberts. So….I have been on a mini-travel marathon of sorts….next? ….D.C.

Today’s topic is property management. Specifically, hiring a property management company…..

Over the years, I have learned the hard way about property management. In reality, good property management is difficult to find. More specifically, “okay” property management is a gem if you find it. I know… I know…I may be going a little overboard….but I digress.

So….I was thinking….what makes a good property management company (PM)…for both commercial and residential assets…..and here is my list….very short….but enough to give you some thought….

1) A PM needs to have a solid understanding of the asset being managed. In other words, does the PM know how to manage a retail shopping center, or a large apartment complex, etc. You see, just because a PM has managed an apartment before…does not mean he or she knows how to managed a 100 unit apartment or a 500 unit apartment. Take a look at the portfolio the PM is managing currently and see where the PM’s experience is. If you want a PM to manage your storage units and the PM’s experience is only in residential homes….you have a big red flag

2) A Good software system. If your PM is using Microsoft Excel to manage a portfolio….you should run. MRI, Yardi, etc….are great software programs that offer clients a lot of bells and whistles. Make sure your PM is using solid systems because…PM reporting, accounting, etc…. is depending on it.

3) Turn-around times a.k.a., “make-ready” time is crucial. PM that are slow at turn-around times when a property goes vacant and the time it takes to get ready for the next tenant is crucial. Whether you have a waiting list or no list at all….having units available quickly will help your bottom line. Find out how fast your potential PM is turning things around by asking other clients what the turn-around time is. If you hear ten business days…then that is too long. One week is the most I can deal with. I like to hear three days. Obviously there are other factors that go into turn-around time…but the shorter the better.

Santa Barbra, CA

4) Communication. Another difficult thing I have learned is if you are having a hard time connecting with the PM….you are probably getting screwed. No return phone calls…..reports have not shown up……etc. Especially for long-distance properties. Talk to the PM’s other clients…ask what the communication is like. Knowing the communication process and how others perceive it will save you a lot of headaches.

5) Network. Talk to other owners about which PMs they use. Ask a ton of questions…how long? What types of assets do they manage? etc. I always like to get a perspective from other investors and see who they recommend. Does it always work? No…but….it is better to get a short list from people you know vs. starting cold.

Anyway…I could go on and on….and I am sure I will on another post….

Until next time……rob

Technorati Tags: compassion international, Property Management, property management company, rob powell, santa barbra ca, software programs, TheRealWealthBlog.com

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