Interview with Bigger Pockets Peter Giardini: “You Profit When You Buy”
Today, we bring you an interview with Peter Peter Giardini of Bigger Pockets. Pete is a successful real estate investor who started with $25K in 2001 and has never looked back. He took full advantage of the “craziness” of the market and sold his entire rental portfolio at the very top in 2006. In addition to his own investing, Pete founded The Club, LLC, a real estate investing coaching program that focuses on strong relationships, accountability, one-on-one coaching and strong local resource networks. Pete can also be heard every Thursday night at 11PM on his radio show.
Mortgage Calculator: You wrote recently about the importance of developing a “systematic way” to develop an offer (purchase) price, and sticking to it. Can you elaborate on what this means? Do you think this is practical in the context of the current market uncertainty?
Many investors seem to want to rush into this game and treat it as a series of individual deals, never thinking about the long term gains that can be derived from implementing “systems” or “best practices” which will allow them to quickly and confidently perform routine tasks without reinventing the wheel each time.
With that as a backdrop… having a well thought out approach to purchasing a deal and being able to know quickly whether it is a deal for you not only takes the emotion out of the decision process but it also allows an investor to quickly gain confidence in their purchasing decisions.
The “formula” that I use is one that many experienced investors know about. It is nothing more then taking the After Repair Value (ARV) and multiplying it by 70%. I recommend to all of my clients that in today’s market 70% is too risky. As a result I require them to use 60% or possibly 65% to arrive at the maximum offer assuming the property was in perfect condition. Since we know that most investor deals are not in perfect condition, the formula continues by taking the result achieved by multiplying the ARV by 60% – 65% and then subtracting the estimated repair cost from that number. This new number is the maximum that an investor should pay for their deal.
Lets look at this using real numbers… Lets say that the ARV is $200,000.00. Applying this formula would look like this. $200,000.00 X 60% = $120,000.00. So if this property were in perfect shape the investor would offer $120,000.00. Now lets assume that it needs $30,000.00 in repairs. We subtract that $30,000.00 from the $120,000.00 to arrive at an offer number of $90,000.00. What happens to the other 40%? That 40% accounts closing costs (buying and selling), holding costs, soft costs (insurance, utilities, etc.) and most importantly… your profit!
I realize that some investors might not be comfortable with this approach, and some markets (but not many) may not support purchase prices at less then 50 cents on the dollar, but I have found that by requiring all of my clients to use this formula… they seem to profit every-time they follow it.
And lastly, I firmly believe that in almost every area of the country homes prices will continue to decline for the foreseeable future. Being conservative in your evaluations and consistently applying this conservative evaluation process to each potential deal will not only protect you as an investor… but ensure your profits.
I love Ayn Rand’s approach and philosophies. I may not agree with everything she has to say… but in Atlas Shrugged she nailed what we are going through today with tremendous clarity. So much so that I made this book required reading for everyone of my coaching members.
In many regards real estate investors are the “creators” glorified in Atlas Shrugged. We are the entrepreneurs. We are the risk takers. We are the ones willing to step into a moldy, smelly, torn up building because we have a vision on how to turn a junker into our profits. Regrettably, in America today, for every creator there is almost an equal number of “takers” who are perfectly comfortable living off of the “creators” hard work.
Responding directly to your question regarding “ordinary” people taking a stand. First I would say that “it is not our patriotic duty to pay taxes.” As real estate investors there are many legitimate ways, when running our businesses appropriately, to protect our hard earned profits from all levels of government. So my advice on this subject is to work with your accountant to ensure you are taking advantage of all the opportunities our tax code offers.
In addition, I believe that it is critically important that every citizen be vigilant regarding government encroachment. For real estate investors this is even more critical because our business provides as its finished product one of humankind’s basic needs… shelter. As such we are constant targets of those who believe that we should not profit for our risk taking and efforts. The only way I know of to counter this continued encroachment is to become more active in our communities. In short, if you choose not to participate… you have left yourself little room to complain!
As a staunch capitalist, some of the recent actions by the government (Congress, The Federal Reserve and the current administration) I believe are counter productive. The government has funneled billions of dollars into our banking system and the effect has been a tightening of credit and further erosion of our business and employment environment.
The lack of credit within our economy has been felt particularly hard by real estate investors… because as we all know this business is hard to conduct without capital!
While many lenders no longer cater to investors, there are still banks that need to lend to investors as it is the only way in which they are going to generate enough revenue to run their operations. Typically these banks are small local lenders with assets of $200,000,000.00 or less. They are easily recognizable because they usually have Savings and Loan or Community Bank behind their names. The key is to identify these lenders and create a relationship with them. Not when you need them… but before you need then. It’s the only way this will work. I wrote a report on how to get lenders to lend you money, that is available for download.
In addition, there are many individuals today who have 401K, and IRA’s who need to find higher rates of return that aren’t tied to the traditional money and stock markets. By applying the principles and techniques identified in the Bankers Report referred to above, many real estate investors can obtain private capital to grow their business without the hassles of dealing with regulated lenders.
One last point… I believe that the government needs to get out of the banking business. If this means increases in defaults so be it… lets take the bitter pill, get well and move much more quickly to prosperity and economic growth.
The first of these sayings is… “You Profit When You Buy”. The simplicity of this statement is profound… and it boils down to this. When a real estate investor purchases a property they need to purchase at a price that will lock in a profit regardless of what happens to the market once they own it. No investor should ever expect that their profits would come from any source other then their shrewd purchase price and their ability to extract, as cash, the equity in that property as they execute their exit strategy.
The second statement speaks for itself… “Some of the best deals I have ever done…. are the ones I didn’t do”.
Now… in practice that means myself and my clients routinely make purchases not only below 50 cents on the dollar, but many times below 30 cents on the dollar. And, as a result net profits on retails sales have been averaging above $35,000.00 and net cash-flow per unit in excess $300.00 per month. Cool Stuff!
I believe prices are going to continue their downward march. Some areas of the country will experience greater continued declines than others. As they say… all real estate is local.
I just wrote an article for the Bigger Pockets Blog, which reinforces the opportunities that this market are offering to real estate investors. I am very bullish from an investors point of view and see that bullishness continuing through the late spring of 2010. If you are sitting on the sidelines waiting… you are wasting valuable time and profits.
As I have written on my Bigger Pockets blog, there are those who believe we could see home ownership rates fall below 50%. I don’t think ownership will decline that low. But, I believe we will see futher declines. It will be hard to avoid given that there are between 3 and 4 million potential foreclosures in the next couple of years. it only seems logical that we will see increase renting in the near future.
If home ownership does decline significantly it will mean many additional opportunities for real estate investors.
As a capitalist, the $8K Homebuyers Tax Credit drives me nuts. In essence we are redistributing our wealth so others may buy a home (I will save the moral judgements for others.) The pragmatist in me says… wow… what a great opportunity to make a profit and help others to buy a home. (Rand would be very disappointed indeed!) From what I have been able to determine the Tax Credit has had a very substaintial short-term effect on the housing market, and it will continue to have a similar effect until it expires in the spring of 2010.
As with any situation, there is a strong possibility that when the Tax Credit goes away, the number of buyers will drop, thereby dropping demand and as a result home prices will continue to slide downward. By how much? I can’t predict… though I would think it would be less then the declines of up to 40% we have recently seen.
As for my advice to homebuyers. I don’t see the Federal Government making dramatic shifts in tax policy which would discourage home ownership. That is a good thing for those looking to purchase a home. Without a doubt prices will continue to decline and that may present some level of risk to homeowners. However, I believe this risk can be easliy mitigated as follows…
- Purchase your home at prices that are at least 5% – 10% below the prevailing sold prices in the area you make your purchase.
- Plan on living in your new home for at least 3 years. By that time we should have worked through the current and “shadow” inventory and prices will have stabilized and may even be on their way back up.
- Follow steps one and two and then if you can afford to put more then 5% down… do it!
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