It’s early on a Saturday morning and I’m probably a good thirty to forty-five minutes from completing a good night’s sleep, but that’s not on the agenda today. In march my two-year old and four-year old boys. One starts by tugging on my arm demanding “come on dad!” and the other is asking and proclaiming “it’s wake up time?!” Welcome to what will turn out to be a nice, yet sleep deprived day with my boys.
Saturdays are like most days in our house … listening to what our kids want. (Just for the record, they don’t get everything they want.) I’ve got to assume that life will be much the same as they get older. (God help us during the teen years.) My point? My kids are no different than most kids and, I confess, no different than me. I’m all about what “I” want. It’s funny and sad at the same time … I’m a 40 year old selfish baby. I’m always searching, positioning and maneuvering for what “I” want.
I like to think I have good and honorable goals to be a good person, a good husband, a good dad. I desire to have a certain level of life style and standard of living for me and my family. I also desire to share the wealth. Getting from point “A” – the desire, to point “B” – the reality, is where the real work resides.
I find myself being just like my kids when it comes to work – I want to do it my way, and being the human being that I am, I’m always looking for a way that requires the least of me and my time. It’s the path of least resistance … but with the biggest reward. Yes, it’s a bit of a contradiction. I find, realistically, it’s more of an exercise in evaluating the myriad of paths and understanding the potential rewards of each.
Right out of college the path I chose was a job in corporate America. Then the path was to move up the ladder to a very prestigious position. Then it was venturing out and starting my own business with great success. All the while I was looking for the path of less and less resistance and more and more reward – the easy road. I had a nice run with the stock market but that didn’t last like I’d hoped. I wanted something that I could touch, feel and get excited about. For me the next natural step was real estate. I was doing well buying, renovating and selling or leasing homes, but owning and managing rental property turned out to be a great exercise in figuring out what I didn’t enjoy.
Owning rental property would have been great without the interviewing potential tenants, waiting for the rent check to arrive, wondering when a tenant would decide to leave, the anticipation of how things would look after they moved out, the relentless costs of owning real estate … property taxes, debt service, maintenance … the list goes on and on.
I remember how my stomach would churn when I’d see a call from a renter on my caller ID. I’d let it ring three or four times while I calculated in my head … how much a new air conditioner would cost … how long it’d take to get a roofer to fix a leak … how many times the toilet had been clogged … then I’d answer the phone with my heart rate going as fast as Lance Armstrong through the French country side.
“Enough!” I said. “That’s it for me! No more!” I finally put my foot down. I wanted to do what “I” wanted to do and I didn’t want the hassles of owning rental properties. That’s when the real work began. What would the path be that provided the least work but the biggest reward? Where would I find the utopia I longed for? It wasn’t some three payment package on a late night infomercial, that’s for sure.
I had the fortunate experience of meeting Steve Presley (now one of my business partners) through our small group at church. He told me about a real estate investing process I’d never heard of. He shared with me how I wouldn’t have to deal with toilets, taxes, tenants, turnover and all the other pitfalls that my previous real estate investments possessed. Being the open minded yet critical skeptic that I am, I said “let’s go to breakfast.” I’m always willing to learn something new over pancakes and country ham.
What I discovered was that up to now my paradigm of real estate investing encompassed a very limited vision of how I could make money – particularly when it came to real estate development and new construction. I thought that when I would see a luxury high rise nearing completion that the developer would then make the individual units available for sale. Little did I know that each individual unit was sold before any construction had even begun. Even in single-family housing developments, I figure the developer was using the “build it and they’ll come” strategy. While building spec (see also speculation) might exist in some areas what I learned was there were individual investors just like me purchasing the real property prior to construction. I was halfway through my stack of pancakes when “preconstruction” became a new and valuable concept for me.
Purchasing something that isn’t build yet still sounded foreboding to me. In an effort to give “preconstruction” my “easy road” moniker I needed to know more. Imagine my delight when I discovered how, with a very small deposit, I could “control” real estate during the construction period without any of the other costs or hassles associated with investment real estate ownership. No property taxes. No homeowner dues. No maintenance. No repairs. No debt/loan service. No tenants. No insurance. By controlling this real estate I’d be participating in the appreciation – at a phenomenal cash on cash rate of return. It’s leverage without the costs of leverage. I purchase a $225,000 condo (2004 price) with a $25,000 deposit. Normally it takes two years or more to complete a high-rise condo development. If the market moves in an upward direction at even a nominal rate my leveraged position is producing exponential returns.
It was as if the clouds had parted and I’d found exactly what I was looking for. Not so fast though. What was the catch? When does Allen Funk come out and say “Surprise! You’re on Candid Camera!”? To my delight, upon further inspection I learn that this method of investing in real estate wasn’t the brainchild of an offshore penny-stock stockbroker but is regulated at the state level and highly controlled by lending institutions. I figured, if some bank is going to loan a developer $150 million then they’ve probably done a little more due diligence than I would or could.
My small deposit of ten percent of the purchase price would be used just like the lender’s money. The developer makes draws on funds during the construction process. My big concern was what if the developer skips out and leaves the project half done. That’s where the lender for the project is in the business of covering all the bases … and other parts of his anatomy. The lender requires the developer to carry a bond – basically an insurance policy on performance with the lender being the beneficiary.
With my ten percent cash deposit in the hands of the title/escrow company and my executed contract to purchase sitting in my filing cabinet now, I watched as construction began and proceeded for the next two-plus years. I had no other expenses. No heart-racing phone calls from tenants. But, what I did see was appreciation. Call it superb critical analysis or dumb luck, but by purchasing pre-construction in a growth market I saw my return on investment double, then triple, then quadruple.
As far as exit strategies go, pre-construction has plenty to offer for my taste. Yes, I could have sold my purchase prior to closing through a process known as “assignment”. Assignment allows the original purchaser to sell his contract, prior to completion of the project, to a third party who agrees to close and take possession. I chose to close myself and spend a little money on furnishings. I didn’t have to put more cash for furniture because my lender gave me a line of credit based on the appreciation I’d seen. I handed over the rental management of my property to the onsite management company. Yes, they take about thirty percent of the rental income, but I don’t have to lift a finger – and that’s how I like things … easy.
Now, on Saturdays I’m spending my time with my boys doing what “we” want to do which usually involves lots of water, countless toy cars and plenty of sand – plus the occasional review of our latest pre-construction investment.