2012 – Year of the Successful Entrepreneur

There is a silver lining to sustained levels of high unemployment and a systemically damaged economy:  it is the impetus to do more with less; to make every dollar count; and to reorder priorities.  The survivors will be those who successfully find the right balance between independence and community.  Freelancers Union projects some 42 million Americans – 30% of the workforce — make their living independently.   But in truth, they can’t make it alone.  Beneath the surface of the stories of thousands of laid-off workers applying for jobs are many who have made the decision to strike out on their own — to make a future for themselves — to become entrepreneurs and masters of their own destiny.  The paradox is that they cannot succeed by themselves.  But perhaps never have there been so many tools and opportunities for the entrepreneur to succeed.

To be successful, an entrepreneur needs vision, opportunity, and guts.  On a practical level, the entrepreneur needs a functional structure,  access to resources, and funding.  For legal and tax reasons, today’s entrepreneur needs to give serious consideration to the right type of entity within which to operate, and it is relatively simple to set up a corporation or limited liability company (LLC).  Thanks to the ever-evolving social media (SM) tools available through the Internet, such as Google+, Twitter, YouTube, Facebook, and Linkedin, not to mention the speed and ease of access provided by smart phones, tablets, and laptops connected by broadband and WiFi practically everywhere, today’s entrepreneur can quickly and easily get essential marketing and technical support, build customer bases, and with just a little effort, reach millions in moments as never before.  Third, with banking institutions stuck in neutral, many investors are discovering the treasure trove of privately held funds looking for an alternative to the roller coaster ride of Wall Street’s offerings, and with an estimated $94 billion in self-directed IRAs, there is plenty of opportunity to go around.

1.   Picking the right entity.  The romantic notion of the sole proprietor rising to the top on his or her own volition is the stuff of many novels, but in today’s complex and modern environment, the entrepreneur is well-advised to protect themselves with a structure within which to operate their business.  Concerns about liability and exposure to litigation may be a bit overblown by those who seek to alarm rather than inform, but there is more to forming a legal entity than just asset protection.  The right entity provides a framework or structure within which to carry on a business properly, with due consideration for proper accounting and legal elements.  Selecting the correct entity can help the entrepreneur confront and even take advantage of tax consequences.  And last, but certainly not least, forming an entity enhances credibility and sustainability of the enterprise — both of which are very attractive features to investors!

2.   Managing Resources.  It takes a village.  The common thread of all successful entrepreneurs is that they knew what they didn’t know, and knew enough to pick good people with the right skills to build successful teams of experts.  Most everyone recognizes that everything is connected — the successful entrepreneur focuses on the points of intersection.  In today’s online environment, where more and more resources are moving to the Cloud, the essential skill is not having the largest number of followers or Friends, but efficiently connecting with the mission-critical individuals and information necessary to achieve your objectives.  Fortunately, the same forces that threaten to overwhelm your bandwidth also provide you with access to extremely skilled individuals who, in their own entrepreneurial way, can help you sort the wheat from the chaff, manage information, and handle the technical details.

3.   Financing.  The mother’s milk of all great ventures is, of course, financing.  But for the vast majority who do not have ready access to venture capital or a loan officer on speed dial, finding working capital can be a challenge.  To the rescue — self-directed Individual Retirement Accounts — held by individuals looking for an opportunity to earn more than what Wall Street has provided, and perhaps gain a bit of altruistic pleasure from helping a fellow entrepreneur.  To be certain, there are rules and regulations, but with the banks and conventional lenders sitting on their hands, it is likely that more and more individuals will seek alternative sources of funding.  It may be 0nly a matter of time before the sum of retirement funds assets held in self-directed IRAs — currently estimated at around 2%, or $94 billion — will expand as the opportunities grow.  When self-directed IRAs compete, entrepreneurs win.

Crisis breeds opportunity.  Motivated by the harsh reality of sustained levels of high unemployment, more and more individuals will be striking out on their own.  Those who take the proper steps will find an interesting combination of new tools and resources, as well as access to financing, that was not available only a few short years ago.   Combining vision, opportunity and guts with practical and professional legal and tax advice, today’s entrepreneur can significantly enhance the probability of success in these turbulent times.

Back to Basics – Investing with Self-Directed IRA

Whoa, Nelly!  If you’re not suffering motion sickness from watching the Dow, you’re probably still recovering from the market’s overall poor performance over the past few years.  You’re not alone.  After a brief recovery, we’re back where the Dow was one year ago.  Meanwhile, real estate prices are a bargain, but getting a loan is still a major challenge.  Many people are discovering the benefits of using their IRA to invest in real estate.  To be successful, you need to understand the basics about both using your IRA and investing in real estate.  We’ve got two very affordable events coming up that will cover both!

A lot of people are taking a new look at using their pension funds to invest in real estate.  The process is relatively simple — you roll your plan funds (401k, SEP, 457, etc.) into an IRA with a custodian that allows you to invest in “Alternative” investments, such as real estate, businesses, notes, precious metals, etc.  Since 1974, the IRS has allowed individuals to use their self-directed IRAs to invest in anything except collectibles or insurance.  (IRS Publication 590).  There is a catch — it has to be an arms-length investment; the account holder cannot receive any direct or indirect benefit.  And, you may not use your self-directed IRA in a transaction involving yourself, your spouse, parents or children.  But the range of permitted options is extremely wide.

Using your self-directed IRA, you can purchase investment rental property, make private loans, purchase a percentage interest in a commercial development, or invest in a new business.  You can combine your IRA with others, and even borrow money using your IRA to leverage your purchasing power.  Investment opportunities are not limited to real estate; you can invest in oil & gas leases, businesses, and yes, even stocks!  The key is to find something you are comfortable with that will generate a nice return on investment for your IRA.  But there are special restrictions, and if you violate IRS rules, the penalties are severe!  On September 21, from 6:30 – 7:30 p.m., I will be joining Ron Ricard, Certified Exchange Specialist at IPX1031 at Intero Santana Row to discuss the use of the self-directed IRA for investing.  Additional details will be updated here soon.

Learning that you can use your IRA to invest in real estate is exciting, but it is easy to get overwhelmed with the range of opportunities, especially with real estate prices at bargain levels.  Even if you have some experience investing in real estate, the market has changed, and like new investors, you need to go back to basics.  On September 17, I will be moderaing a panel of experienced real estate investors who will provide an all-day JumpStart seminar in Cupertino on the basics of real estate investing.  Nothing will be sold — it’s all education and networking.  Topics to be covered will include the pros and cons of different types of real estate investments, how to find good deals, tax considerations, how to finance transactions, and exit strategies.  To attend the JumpStart program on 9/17, go to www.SJREI.org to register and get more information.  Seating is limited, so be sure to register early!

Learn before you earn.  Using a self-directed IRA is not for everyone, and you need to understand what risks are involved before making important decisions involving your pension funds.  The two programs are designed to provide you the basic information you need to make an informed decision.

11 Investment Resolutions for 2011

Do you want 2011 to be better than 2010?¬† What can you do?¬† A lot … here’s some to start with.

1.¬† Set a Goal.¬† Make it realistic but stretch yourself.¬† Write it down.¬† Without a goal, you’re more likely to spin your wheels.

2.¬† Make a Plan.¬† How are you going to reach your Goal?¬† If you don’t know, you’ll get lost quickly.¬† It is likely you will have to adjust your plan, but without any plan, you’ll not get very far.

3.  Get Educated.  Even experienced investors need to learn.  There are new laws, new markets, and new opportunities.  Join a local real estate investment association, and attend meetings.  Listen and learn.  Read books, attend seminars, sign up for a workshop.  Distinguish between education and a sales pitch.

4.¬† Get Professional Help. ¬† A paid consultation with a tax specialist, financial planner, or an attorney may cost you a couple of hundred dollars.¬† But it could save you thousands! ¬†¬† Most professionals can and want to help you be successful — pay them now, or pay them later!

5.¬† Time Management.¬† Time is money, so don’t waste it.¬† Learn to prioritize, delegate, and be more productive.¬† But schedule time for fun, relaxation and exercise.

6.  Assess your Assets.  Assets are what you use to cover your liabilities.   Use a common sense approach when protecting your assets:  risk management includes responsible property management and adequate insurance coverage.

7.¬† Situational Awareness.¬† Knowing where you are in relation to your investment environment is critical to your success.¬† It’s a good time to take a look around and see what’s changed, and adjust accordingly.¬† What’s different?¬† What’s new?¬† Has your cheese moved?

8.  Identify and Tackle Obstacles.  What is preventing you from making progress toward your Goal?  The first step is to identify them, the next is to eliminate them.  Can these obstacles be removed or managed?  If they cannot be eliminated, perhaps you need to reassess your Goal or your Plan; and find a more realistic pathway.

9.¬† Diversify.¬† We know that it’s foolish to put all of your eggs into one basket, but investors do it anyway — it’s easy to stay within one’s comfort zone.¬† Careful consideration of different types of investments may open opportunities that you may not even knew existed.¬† Be smart, be careful, but be alert to new opportunities.

10.¬† Get/Stay Fit.¬† Planning for the future doesn’t make sense if you don’t have one, or if you aren’t healthy enough to enjoy it.¬† It’s well-established that if you are eating right, exercising and getting sufficient rest, you’ll make better decisions.¬† A healthy lifestyle should be a fundamental part of your Plan.

11.  Invest in the Future.  Volunteer some time with your church, community group, or local youth program.  Make a difference in the life of a young person and help your neighborhood and your community.  Donating your talent and time can be a tremendous investment.  The return can yield greater rewards than all of your financial investments combined, not just for your community, but for yourself!

Due Diligence: Local Government Regulations, Policies and Procedures

Recently, I witnessed the adverse impact of a commonly overlooked and hidden cost in real estate investing — complying with local government regulations.¬† These costs can be as expensive as they are surprising to the inexperienced investor, and can make the difference between a profitable venture and a disaster.¬† In my article, “The Five “P”s of Prudent Investing,” I discussed some of the issues investors should consider that relate to local government regulations.¬† In these times of ever-tightening public budgets, where local governments need every dime from every fee, the need to pay attention has never been greater.

There are over 480 cities in the State of California, each with its own Municipal Code, Zoning Regulations, planning staff, elected officials, and policies and procedures that govern everything from historic preservation to rent control to how many parking spaces are required to open a new restaurant.¬† In addition, there are 58 separate Counties, each with their own land use regulations that may or may not be compatible with the different municipal regulations within the same county.¬† Within each County, there may be several special Districts that govern everything from transportation to sewer to water treatment facilities, and of course, multiple School Districts, each with their own governing Boards, boundaries, and policies.¬† You need only compare housing values as they relate to certain school districts versus others to see the dramatic impact that the quality of public schools has on housing prices.¬† This is not unique to California.¬†¬† With some variations, this same pattern is repeated in each of the Nation’s 50 states.

The typical real estate investor considers purchase price and rental rates, and in some cases potential appreciation, in calculating a return on investment.¬† Whether you are purchasing for a “buy and hold” or a “fix and flip” strategy, the formula is fairly similar.¬† However, very few investors seriously consider the impact that local government regulation may have on their plans.¬† The impact is usually felt most dramatically with commercial property investments, but some of these regulations, such as historic preservation, could affect residential property investments as well.¬† Nothing takes the “P” out of Profit faster than learning that the REO property you got at auction for a “steal” turns out not to be a 3:2 with in-law quarters, but a 2:1 with an illegally converted garage that must be returned to garage use before you can post the “For Rent” ad on Craigslist.¬† Or that the dilapidated “tear down” on an urban acre of raw land turns out to be eligible for listing on the National Historic Register and cannot be moved or removed, and must be restored as a condition of acquiring any entitlements to subdivide and develop the remaining property.¬† Or the hillside ranch home that would have a fabulous view, were it not for the fact that over time, the line of trees that originally marked the property boundary to the west had grown to a size that not only blocked any view of the sunset, but now qualified under the local municipal ordinance as a “protected tree” that could not be cut down without risking a severe civil penalty of several thousands of dollars.

One of the first questions I ask a client who is considering the purchase of property is whether local regulations allow them to use the property for their intended purpose.¬† In some cases, for example, the buyers based their pricing offer on a two-lease income projection for what they thought was a duplex, only to find out that the property is zoned R-1 and the second unit was never properly permitted.¬† Or they want to convert the long-vacant commercial building into a restaurant, only to find out that such a use will require a zoning amendment — a process that could take anywhere from six months to 2 years.

Even if the zoning regulations permit the desired use of the investment property, there are many other obstacles to overcome, not the least of which are compliance with current building, fire, electrical and plumbing codes, not to mention regulations and policies governing energy efficiency, access for persons with disabilities, sign ordinance restrictions, and public works requirements such as undergrounding of overhead utilities, installation of sewer lines, and assessment fees for previously installed facilities.¬† In one recent case, the developer not only had to widen the road and construct a new railroad crossing, but also raise the level of a public street by two feet for a distanced of approximately 3/4 of a mile as a condition of building¬† a group of commercial buildings.¬† I imagine his investors weren’t too pleased to hear they not only had to foot the bill for that project, but also deal with the complex nature of negotiating with the railroad company.

The best solution to these obstacles is to learn as much as you can before you commit your funds to a project.¬† If you are an investor, be sure ask the right questions.¬† Consult with a knowledgeable land use attorney, a planner, and a qualified architect with local knowledge of local government practices, procedures and policies.¬† The money you spend up front for professional advice may end up saving you substantial sums in the long run — and may provide the greatest return on your investment overall!

Good (Re)Turn on Investing – In Your Community

Easter is a time of inspiration — to look for the positive side of life.¬† The economic crisis and its impact has been devastating, and the doom-and-gloom forecasters tend to get the headlines.¬† Despite this, I know we’ve survived worse, and we’ll get through this as well.¬† On reflection, it occurred to me that the distinguishing characteristic of a healthy, vibrant society is the willingness of its members to help others; to volunteer their time for the good of the whole; to invest — time, talent and money — in the community.

This year – 2010 – marks the 100th anniversary of Scouting in the United States.¬† Founded in England in 1908, and promoting the principles of doing a Good Turn and urging everyone to Be Prepared, Scouting programs now involve over 30 Million participants in over 160 countries around the world.¬† Here, in Santa Clara County, we have over 4,000 adult volunteers who help leverage the small number of professional staff to provide quality programs, leadership training and opportunities for outdoor fun and activities for approximately 16,000 youth members.¬† In 2009, over 220 boys earned the highest rank in Scouting – Eagle Scout — an accomplishment achieved by only 2 out of every 100 Scouts.¬† As one of these 4,000 trained volunteers, I truly appreciate the sacrifice in terms of time and effort, but I also recognize the value of this collective contribution to my community.

According to studies by Independent Sector, the value of a volunteer’s time in 2008 was calculated nationally at¬† $20.25 per hour, slightly higher for California ($22.79). ¬†¬† It is estimated that each of the 4,000 adult Scout volunteers devote approximately five (5) hours a week, or around 260 hours per year, on average.¬† Each of the 16,000 Scouts contributes at least an hour per month on a service project, and each Eagle project involves approximately 100 service hours towards a community benefit.¬† Added together, Scouting in Santa Clara County generates more than 1,250,000 hours of community service, for a combined value over $28,487,000!

Of course, the dollar value¬† — at best, only a rough estimate — does not tell the whole story.¬† Serving by example, these Scout volunteers provide leadership and inspire others, by fulfilling their promise to follow the Scout Oath and Law, and to Do a Good Turn Daily.¬† Whether building a new trail or working with autistic youth, honoring Veterans or collecting food, cleaning a creek or restoring a public park, Scouts not only improve their community, they show others the true meaning of citizenship.¬† By their actions, these volunteers are investing in their community, and in their future.¬† For a historical perspective, you can review a brief summary of Scouting’s contributions to the Nation since 1910 here.

A Scout is Thrifty, which is the theme of this year’s Friends of Scouting campaign.¬† Scouts have been at the forefront of the Green movement since their inception.¬† This year, the Friends of Scouting campaign goal for Santa Clara County is a modest $784,500.¬† Yet, this money will be leveraged by the combined volunteer effort to produce more than $28 Million in community benefits this year alone!¬† $36 for every $1 donated works out to a really Good (Re)Turn on your investment!¬† So, Do a Good Turn, and make a contribution to Friends of Scouting — and help the volunteers and staff to continue their work serving the community.¬† You can donate online, or send a check.¬† For a copy of the Friends of Scouting brochure and donation form, click here.¬† Any and all contributions of any amount are welcome.¬† And even if you cannot afford to contribute money, think about what you can do to volunteer some time in 2010 to help your community.¬† Thank you.

Asset Protection: A Rational Approach

“You’re going to lose everything you own,” the speaker solemnly warned the audience at a recent real estate investment program.¬† “We live in a very litigious society,” he continued; “you need asset protection.”

Real estate investors, as a group, will flock to hear speakers talk about the need for what is commonly known as “asset protection.”¬† They will spend hundreds, if not thousands of dollars setting up elaborate business entities (the LLC – “Limited Liability Company” – being the most popular), in an effort to avoid “losing everything.”¬† Ironically, many new investors spend more money on “asset protection” than they do on real estate.¬† Sometimes they end up with all sorts of asset protection entities, but no assets to protect.

There is a more rational and practical approach to asset protection.¬† Setting up the correct business entity to allow you to achieve your real estate investing objectives is both important and necessary.¬† The correct entity will allow you to take full legal advantage of tax benefits and provide a structure for running the business.¬† Properly established and registered, the entity will allow the investor to work with investment partners, obtain financing, and provide a basis for determining the relative percentages of ownership and allow for succession and continuity for a successful operation over a period of time.¬† And yes, the entity will provide a measure of “asset protection” for the benefit of the principals, if the entity is properly established and capitalized, and has complied with the appropriate level of corporate formalities.

However, no form of entity is a substitute for good risk management.  The fundamental components of a good risk management program are (1) good management practices, (2) adequate insurance coverage, and (3) regular review and oversight.  For real estate investing, good management practices include using the services of a reputable, licensed, professional property management company.  The relatively small cost (usually 6 Р8%) will be more than justified by the savings from avoiding disasters.  Good management includes proper screening of tenants; regular and thorough inspection of the investment property, arranging for prompt and competent repairs, and if necessary, timely initiation of eviction proceedings.

In addition to standard form “all risk” fire insurance policies, adequate insurance coverage should include, where appropriate, flood, earthquake and other forms of disaster coverage.¬† I recommend that tenants be required to carry renters insurance, which can cost as little as $12 per month, but will cover the tenant’s personal belongings, relocation costs (if necessary), and injuries sustained by their guests.

Last, but not least, good risk management practices includes regular review and oversight.¬†¬† “File and Forget” is not a smart way to manage anything.¬† Prudent owners make sure they manage their property managers, and take steps to ensure that their expectations are met.¬† Do not just sit back and hope the checks roll in every month.¬† Be proactive. Pay attention.¬† Ask questions.

But what about “asset protection.”¬† What if something “bad” happens, the tenant sues, and the investment property is in your name and not buried under an onion’s worth of layers of special entities?¬† What can happen?¬† Indeed, what DOES happen?

First and foremost, the type of liability that owners need to be concerned about involve claims resulting from personal injury, either to the tenant or their guest.¬† Injuries can range from a sprained ankle caused by a crack in the walkway to serious brain injury (or death) resulting from a collapsed balcony or similar structural failure.¬† There are also potential claims based on acts of discrimination, for example, but in terms of monetary damages, the “big ticket” issues usually arise from personal injury cases.

In such cases, the first and best line of defense is good property management, as discussed above.¬† In terms of avoiding catastorphic loss, investing in good prevention can yield a very high rate of return!¬† The next line of defense is your insurance policy (or policies), which should include comprehensive general liability coverage.¬† In the event of a claim, the insurance company will provide legal counsel and will pay for investigation and other costs arising from the incident.¬† If early settlement does not resolve the issue, and the matter proceeds to litigation, your insurance company is most likely under an obligation to provide a defense in most cases.¬† There are general exceptions, such as for willful or deliberate acts, and specific exceptions, such as where the policy does not cover certain types of loss unless a special “rider” has been obtained; i.e. flood, earthquake, etc.

Statistically speaking, it would be extremely rare if you found yourself facing a full-blown lawsuit with a prospect of a large jury verdict that might exceed the limits of your insurance coverage — the type of catastrophic “lose everything” outcome that promoters of “asset protection” programs use to sell their services.

Let’s look at the reality — not the hype.¬† It is fairly well established that close to 90% of all lawsuits that are filed will settle before going to trial.¬†¬† So, if your insurance company has not been successful in resolving the claim and the plaintiff (i.e., your tenant) proceeds to file a lawsuit, the probability of the matter going to trial before a jury is 1 in 10.¬† Arbitration, mediation and other forms of formal dispute resolution are mandated by most State rules governing litigation.¬†¬† In California, the parties are required to participate in a Mandatory Settlement Conference the week before the start of trial.¬† Statistics vary, but in one County, the Court noted that one-third of all remaining cases settle at the Settlement Conference, usually held on the Wednesday before the start of trial; another one-third settle on the Friday before trial, and a percentage settle even after the jury has been seated.¬† Again — as a statistical fact — very, very few cases make it all the way to the end of trial.¬† And even after the Jury renders a verdict, there are appeal procedures, that work to modify the outcome.¬† Many headline-grabbing jury awards are often reduced — drastically — by these types of procedures.

Real estate investors should consider the actual threat of “losing everything” in considering how best to protect their investment and their personal assets.¬† Sadly, many new investors spend more time focused on so-called “asset protection” measures than they spend doing their due diligence in relation to the investment itself.¬† Investors pay money to set up elaborate LLC entities only to find themselves locked into a bad investment with other partners they did not take time to know.¬† If one added up all the personal injury jury verdicts that exceeded insurance policy limits over a 10-year period in the United States, I wonder if the total amount would come close to matching the losses caused by Bernie Madoff and his scheme.

This is not to say that forming a LLC or a C-Corporation is not a good idea.  Properly done, the appropriate business entity provides the means to manage your investment assets, entitles you to certain tax benefits, and manage your investment partners.  But a business entity should never, ever be a substitute for good management practices.

Forecast: 100% Chance of Uncertainty

In a recent article published on September 18 in Forbes Magazine, “Where Home Prices are Hitting Bottom,” author Francesca Levy attempts to make sense out of recently compiled housing price data produced by a Mountain View research firm, Altosresearch.com, in effect trying to explain where and how different Metropolitan Statistical Areas (MSA) would be hitting “bottom.”¬† The data focused on whether the number of homes selling at a discount had declined or held steady.¬† Presumably, if the number of homes selling at a discount was declining, the argument could be made that the housing market in that specific MSA was close to the “bottom” — and a signal to investors to buy.

Four days previously, Ms. Levy had authored another article in Forbes, entitled “Where Home Prices are Likely to Rise.” ¬† In that article, Ms. Levy reported on a housing price forecast produced by Moody’s Economy.com.¬† As reported, Moody’s calculations were based on long-term demographic and economic fundamentals, changes in income and population, and supply and demand.¬† Overall, the prediction was for a nationwide 16.08% decrease in prices by the end of the year, but by 2014, prices “will have nearly reverted to their pre-2009 state.”

For San Jose, the article says that the five-year forecast calls for a 23.04% jump in prices; however, that will follow another 25.14% decrease within the next year!¬† Housing markets in Texas will not see much of a climb, but then they also won’t experience much of a decrease.

As I’ve fondly quoted Yogi Berra:¬† “Making predictions is difficult, especially about the future.”¬† The Forbes articles make for interesting reading, and the online graphics are impressive.¬† But the “small print” caveats continue to provide the harsh reality check.¬† No one knows the full extent of the number of homes that will go into foreclosure, whether Congress will extend (or increase) the first-time homebuyer’s tax credit, scheduled to expire on November 30 of this year, and certainly no one knows if the banks will relax credit and start making loans again.¬† FHA, which has been providing a substantial number of loans, recently announced it has to tighten credit due to low reserves.

All of this makes for interesting reading, but one has to question where it takes us.¬† There are a number of unprecedented anomalies that makes me wonder if the forecast models are valid.¬† At least one real estate expert noted recently that there were over 2 million excess housing units in California — a shocking number given the number of programs designed to address housing shortages in this State.¬† California recently hit 12.2% unemployment.¬† Add to this a “shadow” inventory of properties that have not yet been foreclosed, due either to voluntary moratoriums or deliberate efforts to control inventory.¬†¬† The Wall St. Journal reports there are approximately 1.2 million homes where the foreclosure process has not begun, even though the mortgages are more than 90 days past due. ¬†¬† The repercussions on local governments across the country have yet to be fully felt, let alone measured, yet are causing unprecedented cutbacks in services. ¬† Ultimately, the entire process will come down to buyers’ ability to purchase homes, whether as first-time buyers taking advantage of tax credits and other incentives, or property owners selling their existing property and moving up.¬† Without jobs, this simply will not happen.

Therefore, I question what it means to say that housing prices in any specific MSA will rise or fall over any projected time period, given the current turmoil in the market, particularly the inability of the typical person to borrow money.¬† At the special Norris Group event held on September 11, 2009, “I Survived Real Estate 2009,” the various speakers were remarkably eloquent if not cautious.¬† David Kittle, 2009 Chairman of the Mortgage Banker’s Association, and John Young, Vice President of the California Builders Industry Association, along with other panelists, were quick to point out that for every new home purchase would result in an additional expenditure of $7,500 for furnishings and supplies, and noted that Congress is considering a $15,000 tax credit.¬† They claim that if enacted, this would result in over 400,000 home purchases, significantly reducing the backlog of troubled inventory.¬† Interesting concepts, and worthy of consideration as a means to jump start the economy.¬† But such a move by Congress, if enacted, would definitely throw another wrench in to the forecasting models.

It’s easy to be a skeptic, and I won’t claim to know of a better methodology or model.¬† But I would caution investors to adopt a healthy dose of skepticism when reviewing the ubiquitous “Top Ten Cities” lists as a basis for making an investment decision.¬† Concentrate on cash flow, a strong and diverse job market, and local conditions.¬† A good cash flow investment in a bad market will be a better investment than a negative cash flow investment in a good market.¬† An outdoor enthusiast once told me, “there’s no such thing as bad weather – only bad clothing.”¬† A corollary maxim would probably be that “there’s no such thing as a bad market — only a bad deal.”¬† Good gear can get you through the worst of storms.¬† A good deal will beat a bad market.

Investors need to look deeper into the background information provided by these articles, and REALLY understand the dynamics and demongraphics.  Communities with diverse economies and industries will fare better than those without.

Get Legal Advice BEFORE You Invest

Why should you seek legal assistance as part of your due diligence when considering an investment opportunity?¬† For starters, it might be a lot less expensive than seeking legal assistance after something goes wrong.¬† To be perfectly honest, I would really prefer not to hear a client tell me “I wish I’d talked to you sooner.”¬† Actually, there are several ways an attorney can be a valuable member of your real estate investment team.¬† Here are a few points to consider when making the decision how to maximize the return on your legal dollar.

For starters, you need to focus on your goals.¬† Most successful real estate investors have a clear focus on their financial objectives.¬† If you have a plan and are focused on clearly defined and realistic objectives, you’ll be able to communicate these objectives to your investment team.¬† By staying focused, you can avoid distractions and concentrate on your goals.¬† How can you expect your advisors to help you get where you’re going if you don’t know where you want to end up?

The next step is to make sure you consult with an attorney familiar with real estate issues.¬† Not all attorneys are equally knowledgeable in all areas of the law.¬† You wouldn’t hire a plumber to do your electrical work, or consult with a foot doctor for a head injury.¬† For the same reason, a brilliant patent lawyer may not be the best choice for evaluating a real estate investment opportunity. ¬† If you are not sure — ask.¬† It will save both you and the attorney time — and money.

Next, heed the age-old maxim:¬† “You get what you pay for.”¬† Don’t start the conversation “Do you give free advice?”¬† The right attorney is going to provide you with valuable advice that will be worth the cost.¬† The attorney – client relationship is not only privileged, and over a period of time your attorney can become a very valuable and trusted member of your investment team.¬† Work on developing a long-term professional relationship with your attorney, and you will realize a good return on your investment.

Spend wisely.¬† Let the attorney know your budget.¬† Most attorneys will work with you, so long as you have realistic expectations and take a reasonable approach.¬† At the same time, recognize that the true measure of value of professional advice is avoiding the loss of your investment.¬† If you are investing $50,000 in a project that promises to yield a 10% return, you need to measure your legal costs against the risk of losing the entire $50,000, not as a percentage of your profit.¬† Remember, you will hopefully be able to apply good legal advice over and over — thus maximizing your return on your legal investment.

Avoid litigation.  One of the reasons to do your due diligence is to avoid situations that will result in litigation.  Unfortunately, there are many:  poorly drafted investment contracts; easement disputes; zoning violations; and overzealous promises, to name a few.  No one benefits from litigation except trial attorneys.  Aside from the costs, there are the inevitable delays, fractured relationships, and lost opportunities.  Again:  Avoid litigation.

Follow the advice.¬† You paid for it — so use it!¬† Of course, it’s your choice.¬† But you should at least give the legal advice some consideration before you take action.¬† Many times, an attorney cannot unequivocally state that a particular real estate investment complies 100% with all applicable state and federal laws, tax codes, SEC regulations, etc.¬† Each investor should recognize that there is no such thing as 100% certainty, and adjust their risk tolerance accordingly.

Ultimately, the decision whether to proceed with an investment is up to the individual investor.  Seeking advice from financial planners, tax advisors, real estate professionals and attorneys, as well as from experienced investors, is all part your due diligence.  Getting legal advice before you invest is often a smart investment strategy.