By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com
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3 Potential Problems
I realize that many people reading this are hoping to invest for yourself, but there are probable a few out there that simply want to understand real estate and then invest with someone else; a professional who does this as their full time job. There are 3 potential problems when handing your money over to someone else. The first is that they may lack integrity. I often hear or read of news stories where a local 'real estate investor' has taken advantage of people who trusted her/him enough with their money. Secondly, even if the person has integrity, they may simply not know enough about real estate to consistently make your money grow. Thirdly, even if you find an intelligent and knowledgeable investor who would has fantastic integrity... you are still paying them a cut for doing the work for you. This third problem actually isn't the largest problem, but it is still something to think about. It is common for a real estate investing professional to charge 50% of the earnings in a property for doing all the work which includes: Finding a great deal through her/his network, taking care of putting the deal together, managing the problems in the property as they arise, and managing the people in the property throughout the process. These are significant headaches for a lot of people who want to focus on their own jobs and family and not worry about the 'tenants and toilets' of property management. A question you must ask yourself is: How much money am I now making in my investments? If you know this number and you are able to make more by investing with a professional (even after her/his cut is taken) it makes sense to me that you would invest with the professional, but only after looking into this potential partner and making sure you are investing with a knowledgeable and honest person or company.
Many people see the world in a pessimistic way. You will know you are this person if you scoffed when you read that a managing partner would make 50% of the profit from a property for managing the deal from start to finish. Let me provide another way of looking at the scenario. If you are able to find a way to make 7% return on your investment working on it yourself and a company, after taking their cut, can pay you a steady 10-12% return and also free up your 'investing time' to focus on your family or other work... what is the better option? Is it not usually better to take a smaller piece of pie if it is a much bigger pie and you will end up with more?
On the other hand, you need to know that if you have both the skill/knowledge and time to invest in real estate, you will always make more money by doing it on your own.
I'm not saying one way is better than the other, I'm attempting to challenge those who fear others doing well even if it helps you. The metaphor in my mind is an oft heard anecdote that if you put a few crabs in a shallow pot every time one attempts to get out the others will pull it back in. If you want to do well in the investing world, or even simply in the world at all, it is good to begin thinking of how you can work together with people to create win-win scenarios rather than only thinking about how you can win regardless of how others do. This holds true for both those who will invest on their own (and build relationships with wholesalers and others to maximize their investments) as well as those who trust someone else with some of their investment money. The wealthy of this world tend to think in ways that help others AND themselves concurrently. Having said all this... make sure if you are going to invest with someone (it bears repeating) that they are both a savvy and honest investor.
Other Potential Problems
Alright, what if you truly don't know about how someone may manage your properties for the next 10-15 years (at least) because, face it, you don't have a crystal ball? Here are some ways to mitigate risk when investing with someone else even if you know them and trust them.
1. Make sure you have a share in the decision making of the property
While it may make sense for the managing partner to make decisions on area to invest in and the flooring to install in the property, you should have a say in the exit strategy. You should have an ability to buy out the partner if you decide to do things on your own. You should also have an ability to keep the managing partner accountable for the commitments they made to you from the beginning. The best way to accomplish this is to draft a Universal Shareholders Agreement (USA) with the help of a real estate lawyer. This agreement details all the potential problems and how you will manage these problems. I call it a "What if" agreement; a term my mentor taught me.
2. Your name should be on title
A fantastic way to keep your managing partner accountable is to have your name on title. This way, if something sketchy starts happening you will be notified. An example is if the managing partner begins to take equity out of the property by replacing equity with a second mortgage that takes the loan to value ratio right up to 100% or higher.
3. Make sure all documents you sign are first seen by your own real estate lawyer.
Don't use a run of the mill, do everything lawyer and don't only use the lawyer your managing partner uses. It is always healthy to have an unbiased second opinion from a professional when you are investing tens of thousands of dollars.
4. Interview investors
Just as you would interview a few realtors before selling or purchasing a house or interview a few doctors before you trust your long term physical health to one or interview a few psychologists before entrusting one with your psychological health... wait... you don't interview professionals who are managing your most valuable assets? Welcome to North America where we will interview a bunch of people for a deck costing $3,000, but not a doctor or a realtor who have a huge influence on assets worth so much more than $3,000. Remember... don't miss the hundred dollar bills in life because your focus is on the pennies on the ground!
When you invest multiple potential investment partners you will find that some ask you more questions than others and match your goals with a strategy that meets those goals while others simply attempt to force one investment strategy on you. You will also become better at asking questions because you will hear different perspectives on the same basic strategies. How can it hurt to invest 10 hours of your time meeting with 5 different people/companies before you trust potentially hundreds of thousands of dollars with them?
Summary
It is worthwhile to think through whether you will trust someone else with your money and have the potential to make more while also spending more time with your family and hobbies or, like many, work hard to educate yourself and take the time to manage your own money. If you do choose to trust someone else, take your time and make a decision that has a greater chance to protect your money for many years to come. There are many good, honest, fantastic investors out there if you are willing to put in a few hours to find them.
Here's to your future of risk-averse investing!
If you would like to learn more about investing in real estate please
contact me at the email address listed at the beginning of this article
or go to my website at: www.akerahomes.com/investing-in-real-estate.html
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