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Cliff Hockley, CPM
President, Bluestone & Hockley Real Estate Services
Morris was 55 years old and had carefully invested for his retirement. He kept record of all of his investments. After 20 years he decided to review his progress. He had invested in the stock market, but always envied those that had real estate investments and kept thinking, "does it make sense for me to be investing in real estate?”
He was thinking about this at his kitchen table when his phone rang. "Hello Morris, this is Norm, you want to play golf with me today?" Morris answered, “ Not right now, I’m doing some heavy thinking about my investments."
Norm replied " Let's do it together, I need to review my positions too, so maybe we can share ideas.” Morris pondered for a minute and said, "O.K. I’ll see you at the course."
They met later that morning. Morris was a very quiet man and did not like to share much of his information with anyone. But Norm had been a friend from childhood.
Morris started "I’ve always invested in stocks and I’m averaging an 8 to 15 percent return depending on the years. I would like to diversify into real estate but don't know how to start."
Norm laughed, “I’ve never invested in anything but real estate, and I wouldn’t even know where to look for stocks. I’ve been lucky and had a 16% pretax return on my investments.”
Morris perked up, "That sounds interesting, what should I do if I want to invest in real estate? I want it to be hassle free. I don't want to deal with tenants or repairs and maintenance.”
Norm said, "Well I started small. I decided that I wanted to learn from others, and so I invested $10,000 my friend Fred as a limited partner in an investment where all of the partners put in $10,000. Fred was the managing partner; he handled the monthly reporting to the partners and all of the maintenance hassles. He also warned me that it was possible that we could loose money if the economy did not cooperate.”
“So I waited to see what would happen, and after one year he sent me a dividend check. Since it worked, I decided to do it again until I had $100,000 distributed into 10 investments. All of them did not do as well as the first, but since we were members of a Limited Liability Company, we were able to offset some of our losers with winners. In addition when we applied for financing, it was easier to obtain because we all were involved.
Morris then asked, "How do you choose a good manager? How do I know that I can trust my partners? What happens if they steal my $10,000? What happens if they make poor decisions? What happens if the property manager they use is bad? What happens if a partner dies or gets a divorce? How do my taxes get filed?”
Norm looked at him and said, "Fred had taken the time to prepare a strong and clear LLC/management agreement ahead of time. He made it clear that he was the boss. He even charged a management oversight fee of 5% to make sure that his time was covered. He also covered how disputes would be handled. Fred wanted to make sure everyone got along. He addressed death, divorce, buyouts, valuation of the property and if you needed to invest additional funds if the property did not perform.”
“He made sure lots of insurance was in place, and that it was in place for at least two years after the dissolution of the LLC to ensure we were covered if we were sued during the 2 year statute of limitations after their property was sold.”
“He also addressed buyouts of the partners if the need arose, as well as insurance for the partners if one of them died. Fred made sure that we felt good about the investments and that we were committed to keeping our money invested for 5 years each. He encouraged us to keep an open mind as we flipped those investments into bigger projects. Fred also agreed to invest on a conservative basis and not take unnecessary risks."
Morris mused, “That sounds O.K. to me, but I have heard of a lot of investments that have gone bad. The tenants have not paid the rent, or have gone out of business, or the managing partner has mismanaged the funds."
Norm said, "There is risk with any investment. If you don’t trust a limited partnership, you could always buy a post office, or a triple net leased investment, or a small apartment property to see how it works.”
“My real estate broker/property manager looks for small investments that people can experiment with. But as with any investment, you want to talk to many people to get their opinion and then sort out the chaff from the wheat."
Morris pondered some more, and then said, "Let me tell you about my stocks...”
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