Many of the most successful real estate investors I know use partnerships to rapidly increase their equity and income. It’s a form of leverage – just like borrowed money on a property that cash flows. With financial leverage, you may pull $10,000 (or less) out of your pocket and control a property worth hundreds of thousands of dollars.
If it cash flows, the loan costs and all other costs (taxes, insurance, and an allowance for vacancy and maintenance) are paid for by the rents. But you get all the appreciation. You get all the net cash flow. And you get all the equity built up from the paying down of the loan (amortization). Put $10,000 down on a $200,000 property and buy it under market value. Sell it for $300,000 three years later … and you’ve turned your $10,000 into $110,000, plus the net rents you’ve accumulated and the amortization you’ve picked up.
Subtract your buying and selling costs, and you should still make 10 times your money (or more) in just a few years. That’s the power of financial leverage. “People leverage” works the same way. If you’re in a bubble market, the deals may seem few and far between. You have to work extra hard to find motivated buyers. With a partner, you can cover twice the area. You cover more ground and investigate more possible opportunities in the same time. Partners can also complement you.
If you don’t have money but you have time and know-how, you can find the deals, negotiate, and oversee repairs or the leasing of rental properties. They can get the down payments and financing together. . Another big benefit is the ability to learn from your partners. Some may have more experience in rehabbing than you do. Or they may have developed very effective negotiating skills. And partners can help you expand your reach. They can make it possible for you to invest in the best deals in growing areas out of town (even out of state) that still offer value, even though your local area may now be in a bubble.
Investing in the Best Deals Beyond Your Town
For instance, I’ve made some very good money in South Florida. But this has definitely become a bubble market. Just three years ago, you could occasionally find properties selling at 10 times annual rental revenue. Since then, rents have gone up only 15% to 20% or so. But prices have nearly doubled in many towns. This puts the price to rental value ratio closer to 15 or 20 in most cases. That makes it very hard to cash flow. Yet, thanks to one partner, I’m at contract on a multi-unit property in another Sunbelt state that is selling for less than eight times rental value!
It’s in a city that is consistently rated toward the top of the list in national surveys on quality of life – and where there is both population and job growth. I intend to roll some of the profits from my Florida properties tax-deferred (thanks to 1031 Exchanges) into these much better value properties that have greater growth potential. Thanks to another partner, we’re negotiating on a commercial property in a mid-Atlantic state that could produce 19% to 32% net cash returns on our investment.
It’s a very unusual deal. The land on which the building sits is under a 31-year lease. So the property will only depreciate. It will not appreciate. But the rental yields are so high that we could recoup our total investment in four to six years and go on to make the equivalent of 20% or so yields for years thereafter.
Plus, we’re negotiating for an option on the land itself to turn what looks like a home run into an absolute grand slam. Once again, this is in a market where population and jobs are growing. In fact, it’s one of dozens of baby boomer “early retirement” communities that are quietly springing up in less-crowded areas and creating great investment opportunities. Yet another partner is actively scouting out multi-unit residential properties for me in the same market, including lakefront homes selling for a fraction of what they would sell for in South Florida … and with the potential to more than pay for themselves with their annual rental income.
These partners are friends and business associates who live in other states. We review their markets using criteria I spell out in my Main Street Millionaire real estate program. Then I visit, taking a little working vacation, and write off the trip. While I’m there, we scout the markets, looking for the best values by using a matrix (see Word to the Wise, below) of comparable values (or comps) and rental yield (the rental revenue divided by the purchase price). After I leave, they continue to use our matrix to look for new deals.
My partners will manage the properties locally. For larger properties, they’ll arrange for professional management companies. But in either case, my partners are on the ground. I provide whatever experience and knowledge I have that may benefit them. I contribute capital and financing resources. They scout, learn, contribute toward the down payment, and earn. “Many hands make light work,” it’s said. They can also make for some excellent profit opportunities.
If you’re in a bubble real estate market, you may be overlooking opportunities in other towns and states. You may come from a state other than the one you now live in. If so, you probably still have roots there. You may also have relatives and friends who have moved to different towns and cities. What you want to look for is a town that has not gone through the recent hyperinflation of much of the Northeast, California, parts of Colorado, and much of Florida.
And, just as important, you want to look for areas where jobs and population are growing … and where the quality of life is highly regarded by retirees. Because of the Internet, many professionals can now “telecommute” and live anywhere they choose. For millions of people, there is little reason to be stuck in a crowded city or metropolitan area. People are moving to smaller towns. They want culture (the arts, good restaurants, preferably a university or two). But they also want an affordable cost of living, a bit more room, and a slower pace.
My advice is to look for cash-flow deals in or near those growing downtowns. The supply of land is tighter in the small towns than in the more rural outlying areas. So, as people continue to immigrate, you have greater appreciation potential. And if you’ve chosen an area with good value, you’re still buying at a stage where you can find properties that cash flow even with 10% down or less.
That gives you a very high potential return on your investment. And to expand your reach – and the number of profitable deals you can invest in – look to your friends, relatives, and trusted associates in other towns for potential partners in better value markets that may have far greater growth potential than your own.
[Ed. Note: Justin Ford is the editor of Main Street Millionaire, ETR’s real estate investment success program. For information, click here.]