What Business Are You Really In?

This is where my philosophy regarding multi-family ownership begins to diverge with probably everything else you have ever heard on the subject up to this point. I make no apologies for my difference of opinion. On the contrary, this mindset has come about as a result of the shortcomings in my real estate education and my knowledge of running other types of businesses. I firmly believe that if you grasp the concepts in this one chapter, you will totally understand the multi-family real estate business and anything that is thrown at you, you will be able to solve very easily.
What’s the difference between single-family and multi-family investing?

Suppose there is a single-family house on a street in Idaho that is currently owned by a rather unique family who also just so happens to reside there. This isn’t just any house. This is the house of a famous movie star.
 
Can you name that movie star?

Directly across the street, there is another house, identical in every way; same builder, built at the same time, with the same building materials. But for the fact that it is not on the same lot, it is identical in every way except for one; this house is currently vacant. No one is currently living in this house.

Here’s the million dollar question. Which house is more valuable? If you said neither, they are both worth the same. You would be correct. The properties are valued based upon their market values. An appraiser would look at a myriad of factors to determine the market value of that particular house. The fact that one is occupied and another is vacant has absolutely no bearing on the factors that are used to value that property.

Now let’s use the same example but this time with two 100-unit apartment complexes.

They are identical in every way, built the same time, same appliances, same wear and tear but one major difference; the property on the left is 100% occupied and the property on the right is 100% vacant. Which one is more valuable?

Of course the answer is going to be the property that is 100% occupied. But it’s important to understand why. If the real estate is absolutely identical, then it is not the property that is altering the value. In this case, the real estate is “meaningless” to the valuation (sort of). So what is it exactly that distinguishes these two properties? If you said – income, you would be correct, but to truly grasp the issue here, you need to be even more specific.

The real difference is this – contracts. More specifically, lease contracts. The leases create the income that creates the value. Understand the business behind the leases and you understand the multi-family business.

This is why this is not your typical real estate business. You are entering a business with living, breathing customers. These customers pay you big money every month as long as you take care of them. Leases are the product that you sell to these customers. The real estate, or in this case, the apartment complex, is the business or factory that produces the leases. As you recall from the Most Important Formula, the more valuable the leases are the more valuable the business. Note that I did not say the more valuable the leases, the more valuable the real estate. In the multi-family business, you could have very valuable leases but your expenses are going through the roof and therefore, the business isn’t worth anything.

The biggest mistake a new investor makes in the due diligence process
This is where many new investors start to go astray. They find a deal, make offers, get an offer accepted, put it under contract and then start the due diligence process. During the due diligence process their entire focus is centered on the real estate. They interview and negotiate rates with property inspectors. They set up a date and time that they will go through each and every unit looking for the most egregious example of poor management so that they can go back to the seller and negotiate a repair allowance.

The owner of a bad property will see this coming a mile away and be prepared for it. They will inflate their purchase price to pay you the repair allowance WITH YOUR OWN MONEY. They will play hardball with you and structure the terms of the repair allowance such that the dollars come out of the deal in an in-kind transfer and not in cash. You, at the end of the day, end up with a property that has a list of needed repairs and no cash to fix it.

But that is not where your focus needs to be. Here’s where the new investor goes astray. After the property inspector has completed his task and submits his beautiful 100-page report that you pay for, you will review it and look at the last page that gives a dollar amount as to the needed repairs. You then go back to the broker and open the negotiations all over again and I can assure you, they are lying in wait for you to return.

But the problem with this overdependence upon the inspection report is that, no matter what the inspector finds, it can be fixed with one thing – Money. Just name your price and the roof is fixed. Get three bids and the foundation is fixed. You see, his focus, along with yours and everyone else is on the real estate. I am here to tell you that this is exactly where you should not be focused.

What business are you in? Real estate or multi-family? You are in the multi-family business. What generates revenue in the multi-family business? The factory or the product? The product, or in our case, the leases, is what generates revenue. How much time and money have you spent up to this point in the due diligence process analyzing the value of the leases?

See, when you show up with your inspector and you walk the property with your clipboard and flashlight, the real deal is not going to be found in the units. The real deal is going to be found in the filing cabinets in the manager’s office. That is where you should be spending the majority of your time. Now don’t get me wrong, you will still need to do a complete and thorough physical inspection. But that should be secondary to your “product” analysis.

Why is this so important? It is important for a whole host of reasons, the least of which is the fact that you need to understand the types of things that can destroy your business overnight. Hurricanes, tornados, floods? Nope, you can buy insurance to protect you for those events and in some cases, you might end up better off. Leaky roofs, broken pipes, appliances that don’t work? Nope, those happen all the time and it just takes money to fix.

What can destroy a property faster that a property inspector never finds?

So what can destroy your business overnight and that can’t be fixed with money? The answer, just so we can keep it in the business realm, is bad customers. More specifically, felons, child rapists, drug dealers, gang bangers. Nothing can clear out a nice apartment complex faster than the news that a sex offender has just moved in. Not only will you lose existing customers, your property will quickly get the reputation as being the place where felons can go and live. That is the kiss of death for any property.

Let’s go back to the discussion of the repair allowance. What do successful people do? Successful people do those things that the rest of the world won’t do. In this case, the seller is expecting you to come back with a list of items that shows all the things wrong with the property. He is seeing you coming a mile away because he played the same game when he bought the property. In addition, his broker is preparing him for it and they have already strategized with a response.

But you are not like all the other investors. You look at this business as a business. You look at the strength of the customers as the strength of the asset and you will negotiate accordingly. When you complete the inspection and set up a meeting with the broker to review, you will have two sets of reports. The first one will be the property inspection report. That will have a dollar figure at the bottom. The broker will nod his head, let you know that he will present this to the seller and then ask the waiter for the check.

This is where you distinguish yourself from every other investor. “Not so fast, Mr. Broker, there is one more thing,” you say in your best Columbo imitation. This is when you bring out your analysis of the leases. This is where you show the broker that fifty percent of the files were lacking criminal background checks. This is where you show the broker that there is no income analysis done on any of the residents and therefore the sales pitch that the rents are below market and can be increased is meaningless because there is no way to tell if the current crop of residents could even afford an increase in the rent.

I will guarantee to you that the broker will do one thing; stare at you with the blankest look you have ever seen and wonder what comeback he could possibly muster. He has done absolutely no analysis in this department so he will not have any facts on the table to respond back to you. You will be in complete control of the deal.

Let’s say just the opposite is true. After your analysis, you cannot find anything wrong with the resident files. They are completely up to date and accurate. If that is the case, start getting serious about buying that property. It might be as good as you think. I do reviews on my properties to make sure that the files are up to date. I review credit and criminal background checks all the time and make sure that if I had to sell my properties tomorrow, everything is in order. That’s the type of business you want to buy. (This is not a sales pitch for my properties. This is to give you a vision of what your businesses should be like).

Start Your Online Network Marketing Business Right

As someone who has been involved with direct sales since 2001 I can say that it is not atypical to have someone join this industry, try it for 14 days and then quit. Maybe it’s because it is so cheap to get started that people don’t take ownership in their business. Maybe it’s because people expect to be wealthy overnight.

Whatever it is, it is very unfortunate because good people get a bad taste in their mouth about this industry when they know very little about how to properly build a business. Network marketing is like anything else in life. If you want to succeed, you need to work hard and take consistent action towards your goals.

For some reason people think that the internet is magically going to build their MLM business overnight for them. I have seen some individuals build multimillion dollar direct sales businesses online but they did not do it overnight. They worked incredibly hard and were consistent over many years to achieve that level of success.

Prior to Starting an Online Network Marketing Business there are 5 things that you should know before you begin your journey.

1) You will need to start a blog that offers value. Please do not try to sell your company or the company’s products on your blog. The blog is specifically used to offer information to other network marketers or individuals that are looking to start an MLM business. Write at least 1 blog post a day that targets your market audience.

2) Do not expect to see results overnight. There is nothing in this world that will make you wealthy with very little effort. I can assure you that if there were, everyone would know about it and everyone would be wealthy. I honestly believe that anyone can build a network marketing business if they are self motivated and don’t give up.

3) Do your due diligence and research before joining any company or opportunity. What products do they offer? Would you purchase these products if you were not involved with the company? How long has the company been in business? I always recommend that individuals spend at least 5 days researching an opportunity before they start their business.

4) Build a 30-60-90 day plan on what you want to accomplish. You need to set goals for yourself and track your results.

5) Treat your network marketing business like a business, not a hobby! If you were to spend tens of thousands of dollars opening a franchise would you treat it like a hobby? I sure hope not! The results that you get out of your online network marketing business will be directly related to the amount of work that you put in.

I honestly believe that anyone can build a thriving online network marketing business if they have a little patience and treat their business like a “business” and not a hobby.

In addition the 5 things outlined above you should also have an online marketing plan in place before you begin your online income journey. There are several online resources available to assist you with your online marketing efforts.

10 Mistakes Entrepreneurs Make That Can Tank Their Business Overnight

In the last 100 years or so many businesses have appeared on the American landscape and have grown to behemoth proportions. In many ways, it seemed as though they were inviolate; that nothing could undermine them and bring them down. However, in the last couple of years we have seen unprecedented corporate failures. It has become glaringly apparent that corporations, like people, have certain vulnerabilities. Even large institutions can fail spectacularly. Let’s take a look at some of the most common mistakes business people make that can tank their business overnight, and some things that can be done to avoid these catastrophes.

1. Get insurance for your business. Many people think of business insurance as a luxury. When business is tight, insurance premiums can be absorbed by more pressing corporate obligations. It is vitally important, however, that you maintain proper insurance in sufficient amounts for your business. For instance, if you have employees, Worker’s Compensation and Employer’s Liability insurance coverage is an absolute must. Your business may be hit with heavy fines by the state if your employee gets injured, and you don’t have this coverage.

Separately, businesses typically have Commercial General Liability insurance to guard against accidents and other damaging occurrences in the business place. This type of policy will be invaluable if a non-employee third party is injured on the business premises, or by your goods or service.

Additionally, professional firms like architects and attorneys often carry Error and Omissions coverage to guard against possible mistakes. Many professionals feel that they are much too careful to make mistakes that could be fatal to their business. However, to err is human. If your client’s business is worth any real money, it is possible that you could make a mistake that would be worth millions – and your client just might sue you. Without insurance such an occurrence could easily ruin your business.

There are several other types of insurance that a business may need. You should contact an insurance professional to see what type of insurance, and what coverage amounts will be right for your business.

2. Keep excellent corporate records. One of the largest benefits for a business that is organized in a formal corporate structure is the limited liability protection that the business owner enjoys. If you are an individual in business, and you interact with, or provide goods or services to the public, and a member of the public is injured or experiences some other damage or loss as a result, you could be personally sued for the full extent of the damage. However, if you were to incorporate, or form a limited liability company, or some other form of corporate entity, the maximum that you would be liable to the injured person for is an amount equal to your investment in the business. For this reason, if you are sued, the injured person can only get the cash and assets that you have invested in the company. They cannot “pierce the corporate veil” and hold you personally liable for actions you took in furtherance of your business.

Importantly, in the absence of the corporate structure, or if certain corporate formalities are not adhered to, you are completely exposed to the full extent of the injury or damages caused by your product or service. For this reason it is very important for a business owner that interacts with, or provides goods and/or services to, the public, to properly organize the business by making all of the proper corporate filings, by having letterhead and business cards so that the public knows they are doing business with an entity and not an individual, by having annual director and/or shareholder meetings as applicable, and by keeping proper minutes of those meetings. By adhering to the corporate formalities the business owner can avoid an unforeseen corporate meltdown.

3. Avoid entering into general partnerships. When friends, loved ones and acquaintances go into business they often think of forming a general partnership to govern the parties’ obligations and to structure the returns from the venture. However, it is important to know that general partnerships do not offer any limited liability in the marketplace. In fact, not only can you be held personally liable for the actions taken in the course of the general partnership, you could possibly be held liable for actions that your partner takes that are outside of the business venture.

For example, say you and your partner attend the same client Christmas party. At the end of the evening you and your partner leave. You get in your car and head east and your partner heads west. If your partner had too much to drink, and gets in an accident in the company car, the person your partner hits can sue your partner, your business venture and YOU personally for the harm caused by your partner. There is no limited liability for you, or for the business, in this instance because of the nature of the general partnership. You could lose the business, your home, and all of your personal assets in the event of litigation. For this reason, I never recommend general partnerships to my clients. If they do enter into a general partnership, I encourage them to do so via a corporate entity, which does provide the limited liability protection.

4. Conduct background checks on prospective employees. The world we live in today is often unpredictable. We are all aware that violence in schools and in the workplace is on the increase. Employers can be held liable if an employee “goes postal” and hurts someone on the job, and it is later discovered that a criminal background check would have revealed that the perpetrator had a sordid and violent past. These checks have become necessary, even if the employee doesn’t have to be bonded or insured in their position. Develop a written policy on background checks and on employee behavior. Be certain that each employee receives an employee manual that contains these policies, and that they acknowledge the receipt in writing.

5. Understand the regulatory scheme under which you are doing business. Do you produce or work with hazardous materials in your business? Do you, or does your business, require special licensing in order to properly function? If so, be extremely certain that you understand the federal, state and local rules that govern these instances, and that you are in full compliance with these laws and regulations. If you do not understand the rules, hire a consultant with the requisite education and experience to guide you.

Importantly, situations involving hazardous materials can arise even where someone unrelated to your business causes the pollution. If, for example, you purchase real property that has underground storage tanks, or that was previously used as, say, a munitions manufacturing plant, the soil or building you purchased may be contaminated. You may be on the hook for some major clean up costs, particularly in the event that your employees become ill or injured. For this reason, if you purchase property that has been used for commercial ventures, it is extremely important to include a phase 1 environmental survey as part of your due diligence in examining the property. If the survey shows the existence hazardous substances, you could force the seller to clean up the property before the sale will close, or cancel the sale entirely.

Alternatively, in the event that your business causes pollution, and you manage to sell it to someone that didn’t conduct this due diligence, you may not be off the hook. The environmental regulations in many states reach back through the chain of title and hold everyone that owned the property liable for some portion of the cleanup. This could easily turn into a huge, expensive regulatory and/or litigation mess.

6. Do not ignore Internet marketing opportunities. The rise of the Internet has changed the face of business. No longer will print, television and radio ads and billboards suffice for your marketing plan. If you are a highly specialized professional with little or no Internet savvy, and little desire to develop the expertise, you should consider hiring a consultant or employee to handle these functions.

Social media is quickly burgeoning into a sophisticated revenue-generating advertising medium. If that’s not enough to move you from your position, consider the fact that at the present time much of the social media marketing avenues are currently free or extremely cost effective. However, this may not be the case forever. If you are unwilling or unable to invest the time and money on Internet marketing, you will lose ground to your competition. The Internet represents a brave new world where business is instantly global. Embrace it passionately.

7. Trying to do it all yourself is pure folly. If you are like me, you like to have your hand in every aspect of your business. You pride yourself on your ability to create the superior product, perform brilliant customer service, craft winning business plans and balance the books. However, doing it all yourself almost guarantees that you will miss something important. You should seriously consider building a mastermind team of people that have skills and backgrounds that differ from yours.

Use them as your board of advisors. Engage in brainstorming exercises with them, and, above all… be coachable. Be willing to accept suggestions and to implement changes in your business. Once you open yourself up to this process, you’ll be amazed at the opportunities your mastermind team will uncover for your business, and glory at the many and varied business ideas that will take shape.

8. Honesty is still the best policy. It seems odd to include honesty in this top 10 list. However, the disintegration of companies like Arthur Andersen, and the meltdown of the California energy markets due to scandals caused by Enron and other companies and individuals still loom fresh in the minds of many baby boomers that had their retirement funds completely gutted when the markets crashed and energy prices soared.

Your reputation is all you have. Whatever your industry is, it is a finite universe. People talk. If you think you beat that person out of their hard earned money with impunity, think again. There are no shortcuts in business. Going for the fast buck can lead to your quick demise.

The Internet has developed into an open forum for discussions about the quality of goods and services. People that would have fumed or suffered in silence no longer need to do so. They can and will lambaste your character over the hot coals of public opinion. Additionally, Sarbanes Oxley and other transparent corporate reporting requirements have been developed in recent years to hold executives’ feet to the fire and to ensure honesty in the accounting process. People do business with others that they like and trust. If you want your business to be a perennial success, employ a healthy dose of honesty in all that you do.

9. File your personal and corporate tax returns when they are due. Okay, the Internal Revenue Service (IRS) does not play. I’m constantly amazed at how individuals and business owners can let one, two or even three years go by without filing their tax returns. In the event that you find yourself owing taxes that you cannot pay, file your tax returns anyway. If you owe penalty and interest payments, the failure to file will not mitigate or erase this burden. The failure to file can, however, exacerbate the problem.

Chances are that criminal penalties will not be assessed against someone that files their tax returns without the immediate ability to satisfy the debt. The result may be penalties, interest, garnished wages, or even liens against real or personal property. However, criminal penalties can result where individuals and business owners simply ignore the problem. The bottom line is, do not let the IRS come to you because you have failed to file your tax returns. That is when the real trouble begins. Enlist the help of a tax professional that specializes in dealing with delinquent taxes. Facing the issue head on is your only real chance of dealing with a delinquent tax situation successfully.

10. Failure to listen to your customers can be deadly to your business. Your customers are the best source of ideas and inspiration available to you. You should welcome their compliments and, more importantly, their criticisms. Customer criticisms can lead you to innovations that can help your business corner the market as you develop your product or deliver your service in a way that no one else in the marketplace has done. Conversely, if you continue to give products or service that customers don’t like or don’t need, they will find another company that is more responsive to their needs. It has often been said that 80% of your business comes from 20% of your customers. Be certain to listen to the vocal minority. It could literally save your business.