10 Questions To Ask A Financial Advisor

Many real estate investors that I come in contact with have a severe lack of diversification. Although I am a huge fan of real estate as an investment, I still realize that there are many more roads that lead to financial security & success.  If you ask any financial professional, they'll tell you that you must diversify your assets among many asset classes to protect what you've worked so hard for. If you're not very knowledgeable in other asset classes, or if you just don't have time to manage them,  I highly recommend that you hire a financial advisor.

Start by asking friends and family for referrals, in particular, get recommendations from people whose financial needs, outlook or stage of life is similar to yours. Before contacting planners, look them up online and on LinkedIn to get a sense of what each firm is like. Something as simple as the photos on their homepages can indicate which ones are targeting your demographic.
Also, search for a planner directly on the sites of the Financial Planning Association and the National Association of Personal Financial Advisors. The advisors on the latter organization’s site are fee-only, meaning they will not earn commissions for selling you specific investments but simply charge you a rate, usually based on the assets you put under management. Many experts say that a fee-only advisor is preferable, to eliminate conflicts of interest and ensure he or she always acts with your best interest at heart.

But there is one case when you may not want a fee-only advisor, says and that’s if you want him or her to also help you with annuities, life insurance or disability insurance — basically, other investment vehicles besides stocks, bonds, mutual funds, etc. If so, look for a firm that has a broker-dealer. They’ll get a commission but some people want a firm that has a broker-dealer so they don’t have to go to someone else for disability or life.”

Once you’ve gotten a list of potential advisors, take one more step before setting up appointments to meet: Find out whether each has ever been disciplined for any unlawful or unethical behavior. You can do this using the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck. You can also look the advisors up on the CFP Board’s site, to verify that they each have CFP certification status.

When you have your initial interview, here are 10 questions you want to ask:

1. How do you charge for your services, and how much?

If you didn’t see this information on the planner’s web site, ask whether there’s an initial planning fee, whether they charge a percentage for assets under management, or whether they make money from selling you a specific product. Not only should you know how much the service will cost you, but it can help you determine whether they have an incentive to sell you things.

2. What licenses, credentials or other certifications do you have?
Of the four main types of financial advisors, the certified financial planner (CFP) designation is harder to achieve than Chartered Financial Consultant (ChFC), because the former requires a comprehensive board exam; the latter, however uses the same core curriculum. If you want someone to manage your money, then look for a registered investment advisor (RIA). If you have a high income or a small business owner, you’ll probably want a certified public account (CPA), who can offer you advance tax planning. The personal financial specialist (PSF) certification is usually obtained by CPAs who want to demonstrate they can help clients with comprehensive financial planning.

3. What services do you/does your firm provide?

Implicit in this question is also what assistance the advisor will not give you. Some people are just investment advisors and only provide you advice on your investments, Other people do comprehensive financial planning around retirement, insurance, estate planning and tax planning. Go with someone whose offerings suit your needs.

4. What types of clients do you specialize in?

Some financial advisors have a niche, and if you have a specific interest — such as charitable giving or socially responsible investments or if you’re a newlywed or recently divorced — you’ll want to find one that concentrates in that area too.

5. Could I see a sample financial plan?
There is no one set structure for a financial plan, which means there is wide variation. Some people might give you 50 pages of stuff you don’t understand like charts and graphs, and another planner might provide a five-page snapshot of your financial situation. With a sample, you can say, ‘I really want that in-depth analysis,’ or ‘I don’t understand that.’
6. What is your investment approach?

If you have a strong preference for a particular philosophy, ask the advisor what his or hers is. For instance, if you prefer to use low-cost funds, you can ask whether they plan to use actively managed funds or passive investments. If you like real estate, I would definitely ask them how they feel about real estate as an investment.

7. How much contact do you have with your clients?

Some of planners hold an initial planning meeting and then you see them once a year, and that’s all you get. Others might have quarterly check-ins. Some clients just want to go over everything once a year and then they’re good. Others are looking for more support, so it depends on the amount you want to pay, and how involved you want your planner to be. Are you a delegator? Or do you expect your advisor to explain things to you? If you’re not sure of what you’ll be comfortable with, a J.D. Power & Associates survey found that investors contacted 12 or more times a year had the highest rates of satisfaction with their advisors.

8. Will I be working only with you or with a team?
This question will also help you see how often you’ll be in touch with your advisor. Some will say, ‘I’ll meet with you once a year, but Gina will reach out to you regularly and is my right hand person and does a lot of data gathering for me.’ Some companies have a team approach rather than an individual approach, but in my opinion, one isn’t necessarily better than the other. It’s really whatever your preference is. But I wouldn’t want someone to get into a relationship and say, ‘I only see my advisor once a year, and I thought I’d be seeing him more often.’ Then others really like the team approach because they know if their planner is on vacation, they can still get an answer right away.

9. What makes your client experience unique?

Basically, ‘Why do I want to work with you'? And people should be able to answer that. This will also give you insight into whether their strengths are the ones you seek in a planner.

Finally, there’s one last question you want to ask of yourself after meeting with a potential planner: 10. Did he or she ask me questions and seem to be interested in me?

Does he or she talk 90% of the time? If it’s more like 60/40 and he has asked you how he or she can help you, that’s really important. Financial planning is about looking at the person’s individual circumstance instead of punching in some numbers — it’s based on the client’s goals, financial background, what they believe about money.

Knowing your financial objectives and investing accordingly

Many of the real estate investors I talk to these days are buying for the long term hold. In fact, most don’t have a set time-frame in mind, they just know they want to hold properties as long term investments.  But “a long term investment” for one investor might be very different than for another.  I think many investors these days consider anything over 7 years as a long term hold (especially when you compare this to the type of appreciation and quick-flip investing that was popular during the early 2000’s).

However, I think there are plenty of other investors who are truly interested in owning property long after the mortgage has been paid off.  For these investors, the goal of the investment is less geared towards short term cash flow and more about owning an asset that will produce cash flows farther down the road, especially once the mortgage has been paid off. While I would not necessarily say there is one strategy better than the other, I would say that an investor should be mindful of the true objective of their investment when deciding what kind of financing to obtain.  I would venture to guess that most investors these days are buying with the intention of selling in 5- 10 years with the possibility of capturing some upside from a recovery in housing prices. For these investors, obtaining a mortgage with a longer amortization (ex. 30 years) and the lowest possible monthly payment would be a great way to capture immediate cash flow. While the principle would not be significantly paid down during this 5-10 year hold, the cash flow that was generated and potential equity (from recovering prices) could help them achieve their investing objectives.

For the other group of investors who are truly interested in a “long term investment,” the type of financing they might consider should look different.  If my goal was to own a house outright as quickly as possible so I could generate real income from the property for years to come, I would sacrifice current cashflow in favor of principle paydown (another way to achieve equity buildup).  To do this,  I would take a hard look at the amortization length and weigh my comfort level  as it relates to monthly cashflow (or perhaps even negative cashflow if I’m highly motivated to pay off the mortgage quickly). A quick example:

A $100,000 investment at a rate of 5% interest on a 30 year fixed loan would have a principle and interest payment of $536/mo. This may generate nice cashflow for me, but when I start paying on this loan, only $120/mo is actually going towards principle. Even after 10 years of paying on this mortgage, I’m still only paying $199/mo towards principle.
However this same investment, with the same interest rate on a 15 year loan would look quite different. While my monthly payment is higher at $790/mo … I begin to see equity buildup at a much faster rate. My principle paydown is $373/mo initially but jumps all the way to $616/mo by year 10.
Also interesting to note is the fact that after 10 years, I will have paid $46,100 worth of interest on the 30 year note as opposed to $37,000 in interest on the 15 year note – a difference of over $9,000 worth of interest in just 10 years.

Again, let me stress that I am not advocating one strategy over another. I simply believe in the importance of fleshing out your investment strategy before deciding what kind of financing to put in place. Too many investors obtain mortgages that simply don’t line up with their true investing objectives – especially when it comes to long term investing.  If you are an investor who plans on owning property for a very long time, let me encourage you to crunch the numbers on a shorter amortization schedule and consider sacrificing short term cashflow for future income.

5 Things Private Lenders Want to Know Before Investing With You

If you’ve been investing in real estate for a while, chances are you have considered using private money lenders (investors) to grow your business. Most people fail when reaching out to potential investors because they don’t answer the five critical questions that every private lender must have answered before investing with you (even if they don’t ask them). If you can answer these five questions, you will dramatically increase your fundraising ability. By putting yourself in the shoes of the potential investors and knowing what they are asking when you approach them, you will help to position your offering in a way that greatly increases your odds of acquiring private money to grow your business.

5 Questions You Better Be Able to Answer Before Private Money Lenders will Invest in You and Your Real Estate Deals

Am I going to get my money back?

This is the number one question that private lenders want to know when approached. If they do not feel like they can trust you enough to know that they will get their money back, they will never invest with you. Essentially they are asking themselves if they trust you to do what you say you are going to do. Investors invest with people they know, like, and trust. Potential investors have all heard the horror stories; at this point they are judging your ability to deliver, and they will not likely give you money until they deem that you’re trustworthy.

What’s in it for me?

If you have established trust, the next thing potential investors want to know is how they will benefit. Many people approach potential lenders with the wrong mindset, and tell them all about what the lender’s money will do to help their business. However, investors are concerned about what is in it for them, and you must address that up front.

What are my risks?

Every investment has risks and private lenders want to know, if things go badly what is their downside? Will they lose all the money they invested, or just part of it? Is there a chance they could risk even more than they put into that investment? A realistic investor knows that there are things that could affect any real estate investment’s outcome.They want to know if you understand them and are prepared, and that you have done everything you can to limit their risks. They want to know that you are realistic with your projections, and that they aren’t going to get hung out to dry when you encounter difficulties.

How is my investment secured?

If you are investing in single-family homes, is the investment secured by a first position on the mortgage, title insurance, and hazard insurance? If it is an equity partnership, how is it secured? Is it protected by the cash flow it generates, by hazard insurance, etc.?

Do you have a plan and is it realistic?

Before potential investors will invest with you, they want to know if you have a plan, if you’ve done this before, and have you thought it through or are you flying by the seat of your pants with their money? You must have a plan and it must be written down. You might think this is a “no-brainer” and that everyone has a plan before they approach potential lenders. However, I’ve seen it over and over again: people approach potential investors and they have a vision, but lack a step by step plan for achieving their investment goals.They want to know if you’ve done this type of investment before or if they are going to be a part of a new experiment. This can be one of the biggest hurdles for new investors to overcome. But if you can show experience on your team (notice I didn’t say it had to be you alone) and have a written down, well thought out plan, you will greatly increase your odds of them investing with you.

If you do not answer these five essential questions when talking to a potential investor, they will not invest with you. However, knowing their concerns and answering them up front will greatly increase your odds of acquiring them as an investment partner, thus growing your business faster. The key to raising great amounts of private money lies in addressing potential investor questions before they are asked, having a realistic plan, doing what you say you will, and being amiable.

What is a Real Estate "Proforma"

In this post we will look at a numerical example of a real estate proforma, and then explain each individual component common to all real estate proformas. As you follow along, you might also find this real estate proforma template helpful.The following is a numerical example of a real estate proforma.  This shows a ten year cash flow projection similar to what would be used on a regular basis by investors, developers, brokers, lenders, and appraisers.

Potential Gross Income (PGI)

The top line item in the proforma consists of the cash that could be generated if the property were 100% leased. Forecasting Potential Gross Income is a function of both contractual lease terms, as well as market rents. First, for all of the contractual leases in place on the rent roll, the cash flow for each lease is calculated for each year in the holding period. This takes into account the lease terms specific to each tenant.

Second, if there is any period of time in the holding period not covered by a contractual lease, market rent is forecasted to determine cash flow that could be generated given the then prevailing market conditions. Projecting out potential rental income will often involves accounting for renewal assumptions after a lease expires. This includes forecasting market leasing commissions, tenant improvements, abatement, reimbursements, etc.

Vacancy Allowance

Because it’s not realistic to assume a property will be 100% leased forever, the vacancy allowance line item on a real estate proforma accounts for expected vacancy of the property.  Vacancy can be calculated in several different ways, including taking a simple percentage of the potential rental income, or using a total dollar amount for each year in the holding period.  Other, more advanced ways of accounting for vacancy include calculating downtime between leases, and taking into account prevailing market conditions.

Other Income

Other income items typically show up on the real estate proforma after vacancy allowance. Other income items usually aren’t a part of contractual leases, but still provide additional revenue for the property.  Examples of other income items include billboard, laundry, parking, or antenna income.

Effective Gross Income (EGI)

Subtracting the vacancy allowance from potential rental income for a property, and then adding in any other income items, results in what’s known as the Effective Rental Income.

Operating Expenses

The next major category on the real estate proforma is operating expenses. Common expense line items include property taxes, property insurance, property management fees, and utilities. Often Class A tenants will have so-called net leases, where the tenant pays all or most of the operating expenses.  Other times, landlords will negotiate reimbursements where the tenant is required to pay a portion of the operating expenses each year.

Net Operating Income (NOI)

The Net Operating Income is derived by subtracting all operating expenses from the Effective Gross Income for a property.  The NOI is perhaps the most widely used indicator of cash flow for commercial real estate. However, it is important to note that the NOI ignores irregular expenditures like leasing commissions, tenant improvement allowances, and some capital improvement expenditures.  Accounting for these items in the Before Tax Cash Flow indicator results in more accuracy.

Other Expenditures

Other expense items associated with a property that are specific to the investor, or that don’t occur on a regular basis are included here.  Examples include debt service, leasing commissions, tenant improvement allowances, reserves for replacement, and some capital expenditure items.

Before Tax Cash Flow (BTCF)

Netting out any other expenditures items from the Net Operating Income results in a Before Tax Cash Flow for the property. This gives a clear picture of free cash flow available to the owners of a property, before debt service and taxes.

Reversion Cash Flows

In addition to forecasting the operating cash flows using the above proforma line items, the reversion cash flow, or net sales proceeds, must also be taken into account on a real estate proforma.  The reversion value can be estimated in a number of different ways, including taking a terminal cap rate and applying it to that year’s NOI, or applying a percentage of growth method to appreciate the property over the holding period. After a sales price is forecasted, any outstanding debt is netted out, as well as selling costs and taxes, to arrive at a net sales proceeds figure.

Income Property Due Diligence Must-Do’s

One of the most important steps in the real estate investing process is due diligence. I have seen a lot of investors (not my clients) get burned in deals where they fail to take all the appropriate steps in performing a thorough due diligence analysis of their investment property. So I want to share with you some little known secrets in the due diligence process as well as opportunities that can be identified. For those of you who have some experience with this process, you already know there are several major categories which must be addressed in doing due diligence for multi-family and commercial investments. Some of those can include environmental impact studies, building inspections, lease/contract agreements, etc. I want to share with you the some of the secrets of financial due diligence.

Financial Due Diligence Secrets

How many of you have been presented with a great cash flowing property only to find out later that the picture painted is not at all what it seemed? When we buy income properties, one of the most important things to understand is the financial status of the property. Very often, we are provided with “Proforma” financial information of the property which is used in our calculation of items such as the cash on cash return, cash flow, and return on investment. One of the most important things that you should remember from this post is that you should NEVER buy a property based on “pro forma” financial information that you receive from the seller. The reason is because “pro forma” financial information, by definition, is only estimates of how the property “may” perform. These numbers are only estimates that have been generated by the seller/agent.When we buy an investment property, we want to purchase the property based on its “actual” performance. So it doesn’t matter how high of a return or cash flow the “pro forma” financial information indicates, we need to know how the property has actually been performing. Here are the top 2 reasons why we don’t rely on “pro forma” financials:

1) I personally have never come across a property where the actual performance was better than as indicated by the “pro forma” financial statements. Rather, in most instances it’s the other way around with the actual being significantly lower than the “pro forma” numbers.

2) Since “pro forma” financials are only estimated amounts; it is extremely difficult to do the due diligence testing of these projected numbers.

Financial Due Diligence Process Details

Once you receive the actual financial information from the seller, now its time to begin the financial due diligence process. So what exactly does this entail and how is it done? I always explain it to clients this way: Think of financial due diligence as an audit.You, the investor,  are the auditor. You want to take a look at all the numbers as presented and make sure that they are accurate, reasonable, and comprehensive.  The rent, other income, expense, and loans need to be verified with third parties (ex, banks, and tenants, contractors) to ensure that they are accurate and comprehensive. Here are three tips to performing your financial due diligence:

1) Aside from obtaining bank statements, rent rolls, and credit card statements, one of the most powerful tools that I utilize in financial due diligence is the seller’s tax returns. A quick way to test for the validity of their financial information is to look at the tax returns filed by the seller. Look for any discrepancies between tax returns filed and financial information provided by the seller. Any inconsistency that you find may be areas that you would want to dig further into.Why is this such a good tool to utilize? Well, it’s extremely rare for someone to over-report income on their tax returns, so the income numbers you see on the tax returns are often a good indicator of the actual performance of the property.

2) For all income and revenue items, you want to verify its “existence”. This is where you would review rental/lease agreements and review bank accounts to ensure that the rental revenue as provided by seller actually “exists” and the money is collectible.

3) For all items of liability such as loans, deferred maintenance, and debt to outside contractors, you want to test for “completeness”. Since these are items that will likely be expense items once you take over the property, you want to make sure that you are aware of all these future liabilities. It is possible that there are liabilities relating to the property that have not been disclosed to you by the seller. So the financial due diligence process of testing for completeness is aimed at detecting any items missing from the information as provided by the seller.

Make Sense of it All

Due diligence is an expansive and extensive process and often times need the expertise of outside advisors and professionals. Most good investing agents (Realtors) will walk you through this process. But even with that said, in the end, YOU are the one that's sticking your neck out there by purchasing the property. So make sure that you know the numbers and that everything makes sense.

Connecticut Based REITs

If REITs are a part of your investment portfolio, or if you've been thinking about investing in REITs, It's a good idea to start in your own back yard. Urstadt Biddle Properties Inc. (UBP) and Starwood Property Trust, Inc. (STWD) are two Connecticut based companies that you should be looking at.

Urstadt Biddle Properties Inc is a self-administered equity real estate investment trust founded in 1969 providing investors with a means of participating in the ownership of income-producing properties with ready liquidity. UBP's core properties consist of community shopping centers in the northeastern part of the United States.

Urstadt Biddle Properties Inc. is located at 321 Railroad Avenue, Greenwich, CT 06830 For more info on this company, visit www.ubproperties.com

Starwood Property Trust, Inc. is a holding company and conducts its business through its subsidiaries. The Company is focused on originating, investing in, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (CMBS), and other commercial real estate-related debt investments. In addition, it also invests in residential mortgage loans and residential mortgage-backed securities (RMBS). It makes certain investments in RMBS, which it uses as an alternative investment for its available cash. In April 2013, Starwood Property Trust Inc acquired LNR Property LLC from Vornado Realty Trust, iStar Financial Inc (24%), Cerebrus, and Oaktree Capital Management LP.

Starwood Property Trust, Inc is located at 591 West Putnam Avenue Greenwich, CT 06830. For more info on this company, visit www.starwoodpropertytrust.com

Real Estate Investing for Dummies (Review)

I highly recommend this book to new/aspiring investors



This is a great book for anyone that's thinking of getting into real estate investing. It gives you a general understanding of most real state investment strategies and how to properly execute them. It's truly an excellent educational tool to help you safely gain wealth through investing. It gives many useful tips to show you how to avoid commonly made mistakes that could end you up in bankruptcy and even criminal court.

TV is cluttered with infomercials about how you can buy real estate with no money or credit and get rich quick. Common sense should tell you that's an exaggeration. Nevertheless, it is possible to get rich gradually by investing in real estate.

"Real Estate Investing for Dummies" gives you the keys to successful real estate investing, whether it's in single family homes, condos, apartments, vacation homes, commercial properties (office, industrial, and retail), raw land, or REITs (Real Estate Investment Trusts). With guidance from authors Eric Tyson, MBA, a financial counselor, and Robert S. Griswold, a veteran real estate investor, you'll discover how to: Find and buy the best properties at a fair price. Capitalize on opportunities such as foreclosures, auctions, tax sales, and more. Secure financing and good mortgage terms. Value, evaluate, and negotiate everything to do with real estate. Work with agents and other professionals. Project income potential and cash flow and handle contracts, inspections, and closings.

I give this product a Thumbs Up because it makes since and it's an easy read!

 

Buy it now from Amazon