The article makes the really good point that you should be in the startup game primarily for the love of what you’re doing, not the money. But this is true for almost any endeavor, because the reality of almost anything where you can get rich is that it’s definitely not a sure thing. So if you’re going to spend years of your life slaving away at something without a good chance of a big payoff at the end, you better be enjoying the journey itself or you might get to the end of your life and find that you wasted it on something you hated for nothing.

I can’t deny that the math of the piece is solid, but I really do question the assumption that you should take that money that you made creating value by running a business and invest it in the stock market, where you have zero input or control over the outcome. There are lots of other paths you can take, but I’ll focus on the one that I know best: multifamily real estate.

I know, I know: real estate is such a risky proposition right now! Am I crazy?!? Let me run through the numbers with you, and you can tell me.

Let’s take our hypothetical entrepreneur who just cashed out for $4.3mm and see if we can retire her within a year or two. And to be more conservative, let’s just use $1.3mm of the money for real estate. She can put the rest in stocks, bonds, or Uncle Morgan’s ice cream truck business.

Our goal is to purchase a nice, class B apartment complex in a good market with solid fundamentals. For the sake of this example, let’s use the Dallas market. I jumped on LoopNet.com for a few minutes to look for good prospects, which is also conservative, as the best deals don’t ever make it to LoopNet. You’d be better off retaining an experienced multifamily broker in the market, but this will suit our purposes for now. We’re going to take our $1.3mm and put a 20% down payment on an apartment complex, obtaining financing for the remaining 80%, either through a traditional bank loan, seller financing, or some combination. This will give us the ability to purchase a property valued at around $6.5mm. Let’s be conservative and limit to $6mm, so we can keep some cash in reserves and pay for any deferred maintenance on the property. So a perusal of LoopNet turns up this potential investment:

Asking price is $5.5mm, it looks like a solid class B place, it’s got 151 units, mostly 1 bedrooms, it’s 80% occupied (more on this in a bit), and it was built in 1985, so hopefully it’s not falling apart yet. The effective gross income on the property is $920k / year. Now, obviously this would require a LOT more due diligence, but this is one of several properties like this that I found with a few minutes of searching in one market in the US, so it’s not terribly unlikely to find a similar deal even if the numbers didn’t pan out on this one.

Operating expenses on properties like this vary, but 50% of the gross income is a good rule of thumb. The listing for this property says $500k, so that’s about right. Let’s use $500k as the number for the operating expenses, which includes maintenance, taxes, insurance, management, etc, basically everything except for debt service.

So our hypothetical entrepreneur does her due diligence and decides to buy the property. Let’s assume that she pays the asking price, puts down her $1.2mm (holding $100k in reserve) and gets a 6% loan for the remaining $4.3mm. With a 30 year amortization, that’s an annual debt service of about $310k. Her net pre-tax cashflow is therefore $920k – $500k – $310k = $110k / yr. This represents a cash-on-cash return of just over 9%. So not quite $200k / yr, but we’ve also only invested about 1/4th of our total cash to get that annual cashflow. And there are some other big benefits here as well:

First, our entrepreneur is in control, unlike the stock market. If things change with her property, she can be proactive and adjust her strategy, having a direct impact on the management of the asset.

Second, there are other potential sources of return beyond just the annual cashflow. She’s amortizing the loan every year, building up equity in the property. And there may be appreciation as well, though you don’t want to count on this. Still, it’s a nice bonus if it happens.

Third, real estate is a natural hedge against inflation. The rents can be raised annually to keep pace with inflation. (Bonus: your mortgage payments do not increase annually.)

Fourth, this particular property may offer some attractive options for adding value. The occupancy rate of 80% could be improved, for example. Improving the condition of the property, putting in new management, cutting expenses where possible, raising rents, and getting the property leased up to 95% could easily double the pre-tax cashflow on the property, and seriously increase the overall value.

Finally, we should take tax benefits into account. You’re allowed to write off a portion of the value of the property (excluding the value of the land) each year as depreciation. And thanks to this write-off, it’s very likely that this property would show a paper loss for the first few years, which means our intrepid entrepreneur would pay zero income taxes on that cashflow. Zip, zilch, nada. No federal income tax, no state income tax, no FICA, nothing.

Is this an easy or risk-free investment? No, it’s really not. You’ll need to learn a lot about real estate before you head down this road. Buying an apartment complex like this is buying a business, and you should treat it accordingly. But you should also learn a lot about the stock market before you head down that road. If you turn your money over to some wealth manager and have no idea what they’re doing with it, you’re putting yourself in a bad position. And it’s definitely true that real estate is a lot more work than just pulling up etrade.com and buying some shares. But then, that’s the difference between growing your net worth from $4m to $400m, or running out of money at 50. In the end, which approach is really riskier?

Update: if I could recommend just one book on the type of investing I’m describing above, it would be this one: The Complete Guide to Buying and Selling Apartment Buildings

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1. You don’t really want a million dollars
2. How a Barista and Losing a Quarter of a Million Bucks Taught Me to Ask for What I Want
3. $1.2 million for Ron Paul in 9 hours

There are a lot of possibilities, but part of me wonders if it’s because real estate is truly an industry where people can create incredible success stories in relatively short periods of time. A field where reputation and pedigree are not nearly as important as hustle and persistence. The best lies have an element of truth, so when all these guys sell their ridiculously overpriced seminars and coaching services to starry-eyed dreamers hoping to make it big, maybe we fall for it because deep down, we know it’s partly true.

At least that’s what I’m hoping What do you think?

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I have several real estate rental units back in Colorado (I live in San Francisco) and I have a property manager who takes care of them for me. She’s been using QuickBooks to track everything, but as I was transferring all the exported data into TurboTax, I finally had had enough and vowed to seriously check out some web-based property management services and see what the options are. Basically, I’m looking for the following things:

• a simple, clean, efficient user interface
• affordable and scalable
• ability for multiple users with different roles to log into the same account
• track income, expenses, tenant info, maintenance, etc.
• track performance, such as vacancy rate, average rent, etc
• be flexible enough to handle situations like tenants paying late, pro-rated rents, and whatever other weird situation comes up
• ability to upload files, like leases, photos, etc.
• tax reports with pre-defined categories for ease of entry when tax time rolls around
• full data export capability, so that I can get my data out if this company disappears at some point

I looked around and did some searching and came up with a list of seven apps that I wanted to check out and delve into further. Here’s the list:

• propertyware.com
• propertycenteronline.com
• buildium.com
• irealtymanager.com
• rentomatic.com
• rentyield.com
• propertize.com

I don’t really have time to go through all of these one-by-one and give you an overview, but I will say that I was most impressed by Rentomatic and Propertize. Rentomatic has a great interface and a fantastic dashboard that lets you see how your portfolio is performing at any given time. It’s also got a sweet feature where you can setup profiles for each of your units and then post them to Craigslist and other rental sites. The two main features that it’s missing are the ability for multiple users to login and the ability to upload files like leases.

That said, I currently have to give the edge to Propertize. The functionality is very similar to Rentomatic, but it’s a bit cheaper, the interface is a bit better, and it offers the ability for multiple users to login to the account. Sadly, it too lacks the ability to upload, but they’ve been responsive when I’ve offered feedback, so perhaps it’ll make it in the app eventually.

I’m continuing to play around with them both, with the goal of making a decision by Dec 1st, so we can get up to speed on the system by the end of the year. If you’re in this space, let me know what you’ve found that I might have overlooked.

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Truthfully, I can’t say that I’m unhappy about the progress I made over the last year, but it’s definitely less than what I had hoped for. I tend to look forward a year and imagine that things will have changed much more than they have. I imagine that my progress towards various goals will be much more substantial, that my life will look more different than it inevitably does, that I’ll have changed more than I have. Why? Well, probably because I’m an optimist. But also because change is hard.

There’s nothing really profound in this post, just some lessons that I need to remind myself of on occasion. Earlier this evening, I was sitting at dinner, pondering some conversations I had today about opportunities in the real estate market. The real estate market has taken a beating, and right now is a fantastic time to buy if you can make the deals happen. But financing those deals is hard, lenders are wary, and cash is scarce. On top of that, the general feeling in the real estate market right now is one of fear and dejection. The vast majority of people (even experienced investors) would conclude that this is a good time to sit on the sidelines for a bit and wait for sanity to return. But I wonder if times like these separate the timid from the titans. I spent some time today on the phone with lenders and people who are out there doing deals, and I’m much, much further along than I was at the beginning of the day, though perhaps still a long way from doing any deals. But the thing I realized tonight is that lack of capital, connections, experience, etc, etc. are not what’s holding me back. The only thing holding me back is me. The only thing keeping me from diving in 100% and making something happen is my unwillingness to do so, for whatever reason. Sure, lack of capital, connections, experience or whatever else will slow me down and make it that much harder. But it definitely can be done. I just have to want it badly enough.

As I think about what’s truly and honestly holding me back, I’m reminded of a quote:

“After a lifetime of making money and observing better men and women than I fall by the wayside, I am convinced that fear of failing in the eyes of the world is the single biggest impediment to amassing wealth.”
-Felix Dennis

What’s holding you back?

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http://www.StarSF.com

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Through some real estate networking events in San Francisco, I met the partners of a small real estate brokerage here in town called Star Realty that focuses on helping residential investors make the jump to commercial real estate investment. They’ve only been around for a year, but their business is solid and they’re just now starting to really think about building a system to enable strong growth over the next 5-10 years. The two partners aren’t very tech-savvy but they understand that this is the direction the industry is going and they have a chance to be on the cutting edge if they start now.

We’ve been discussing working together for awhile and we have decided to move forward, so I’m very excited. I’ll be working on helping them overhaul their brand and build long-term brand equity online. As this combines several of my favorite subjects, and is a chance to get in early and have a meaningful impact on their long-term success, I’m very excited and have tons of ideas on how to help them succeed. I’ll post more about things once we get setup, but just so you see what kind of challenge I have ahead of me, check out their current site:

http://www.star-sf.com

Update: I’ve heard concern from a couple of clients that this will impact my work with them or that I’m giving up consulting altogether.  Just wanted to reassure everyone that I’m still very much available for consulting work and will be for the foreseeable future.  This is just a client engagement that I’m particularly excited about because I feel it will have a strong impact and further my knowledge of marketing and building brand equity in the social media space.

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PS – The name comes from the word “bounteous”, just in case you were wondering.

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All men dream: but not equally. Those who dream by night in the dusty recesses of their minds wake in the day to find that it was vanity: but the dreamers of the day are dangerous men, for they may act their dream with open eyes, to make it possible.

T. E. Lawrence, “The Seven Pillars of Wisdom”
British soldier (1888 – 1935)

I’ve posted this quote before, but it’s especially appropriate for recent developments in my life. I haven’t posted to my blog in the last 3 months, and so much has changed since then. Let me give you the highlights:

This Blog
I’ve received lots of notes from people asking if I’m going to finish the investing series I started. I owe my readers an apology. I’ve just been swamped with a bunch of other things, some of which you’ll read about below. I wanted to let people know that not only will I be finishing this series, but I’ll be launching a new project in the next few weeks that the readers of this blog will hopefully find very interesting. It’ll live on a new site of its own and I’ll be releasing details within the next couple weeks, hopefully, so stay tuned. I know you’re probably thinking that I’ll flake on this as well, but the good news is that my time has opened up some. For more, read on…

CNET Networks
As I’ve mentioned before, my day job is an Associate Product Manager at CNET Networks, one of the largest web companies in terms of traffic. I started at CNET in August of 2006 and I’ve really learned a lot there and made some great friends. However, about three weeks ago I started looking around for some contract work, primarily through craigslist.org. After about a week, it was apparent that not only was there enough work for several full-time jobs, I could make 2-3 times as much doing freelance work as I was making at CNET. I managed to hang on for a few more days before I decided that going freelance full-time was the right move and I gave my notice at CNET. My last day was Friday and I am now completely free. I have punched my last clock and done my last 9-5. From where I’m sitting right now, I have a hard time imagining any circumstances under which I would be an employee again, but I’m always open to discussion . I already have more than enough work coming my way to stay busy and I now have the flexibility to be able to work from anywhere in the world, at any time that I choose. I’m sitting in a 24-hour starbucks in San Francisco writing this at about 12:30am and it’s comforting to know that I don’t have to get up in the morning unless I want to.

I will say that CNET was an awesome opportunity for me. They gave me a shot when I needed it most and it was a fantastic place to cut my teeth in the web field. I met a lot of very passionate and talented people who inspired me greatly. They offered me a great job before I left, but ultimately, I’m just not an employee. I came to the Bay Area to start a company, not work at one. I don’t want people to think that I’m saying that there’s anything wrong with being an employee or that I didn’t enjoy it. I am fortunate in that I have skills that are in such high demand that I can pay the bills with part-time freelance work and have a lot of time left to focus on projects of my own, some of which I’ll talk about below.

Oh, and my wife quit her job the same day. She’s been working towards it for a lot longer than I have and now we’re both unfettered freelancers, free to travel the world, set our own rules, and take the road less traveled.

BlueSwarm.org
For the last six months or so, I’ve been hard at work with two brilliant and talented partners on a project called BlueSwarm.org. It’s a social network aggregator / lifestreaming / friendstreaming service, which are all fancy ways of saying that it helps you easily keep track of what your friends are doing all over the web and vice versa. Very cool stuff. We launched a private beta of the site on July 7th and have been steadily working on improvements since. Please check it out and request an invite…we hope to be giving out a bunch in the next couple weeks.

Real Estate
As I noted in a post earlier this year, I purchased a single family home with a partner and rehabbed it. We had it on the market for about six months before I finally decided that I’d rather keep it than drop the price any further. I negotiated an agreement to buy out my partner and I now own my 2nd long-term rental property.

Last Wednesday, I was forwarded an email about a sweet little 3/2 condo and managed to put it under contract at a great price within the next 24 hours. The best part is that about 75% of the purchase price is covered by an assumable private note at 6% fixed (!) and the current seller agreed to carry another 15% of the purchase price at 7.5% fixed, leaving me with just 10% to put down and no banks or mortgage companies to hassle with. If you can find a private lender at a good rate, I highly recommend it. We can close any time that works for us, so hopefully in the next couple weeks, I’ll own my third property. The empire grows…

I think that’s pretty much it…I’m also getting my pilot’s license and learning to sail, but so far those haven’t been too time-consuming

In closing, I would just like to say that I’m overwhelmed by how richly God has blessed my life in just about every way. I’ll be 25 years old in less than a month and the world is stretched out in front of me, filled with endless opportunity. I say this not to brag, but to encourage others to take the road less traveled, to take risks, to discover and follow their passions. I won’t say that it hasn’t been hard at times and sometimes it’s completely overwhelming to have a seemingly endless array of options available, but overall, I wouldn’t trade it for anything. Once you taste the freedom, you won’t either.

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3. November 2010 Blog Income Report

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A few of the streets in Manhattan, like Fifth and Park Avenue, are home to some of the most concentrated areas of personal wealth in the world. These people buy homes for $10 – 25 million in cooperative buildings. Unlike condos, where owners actually own their unit and pay dues to take care of the common areas, cooperatives are owned by a private corporation, with the shares being held by the owners of the units in the building. As a result, the boards of these coops have absolute power to accept or deny anyone the right to buy a unit in the building, for any reason they deem suitable. Billionaires, celebrities, politicians, and musicians have all been turned away from some of the most exclusive buildings, not because they couldn’t afford the unit in question, but because of their industry, their reputation, or simply their lack of pedigree.

It’s a very interesting inside look at the way the ultra-rich families of America protect the space around them and maintain, for better or worse, an exclusivity and elite status that lasts for generations.

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2. Star Real Estate splash page up
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