NOTICE: You Do NOT Have the Right to Reprint or Resell this Report! You Also MAY NOT Give Away, Sell or Share the Content Herein If you obtained this report from anywhere other than http://www.yourrockstarlife.com, you have a pirated copy. Please help stop Internet crime by reporting this to: support@yourrockstarlife.com Copyright Karadza Publishing Inc. All Rights Reserved. No part of this report may be reproduced or transmitted in any form whatsoever, electronic, or mechanical, including photocopying, recording, or by any informational storage or retrieval system without express written, dated and signed permission from the author. Disclaimer and/or Legal Notices: The information presented herein represents the view of the author(s) as of the date of the publication. Because of the rate with which conditions change, the author(s) reserve the right to alter and update their opinions based on the new conditions. The report is for informational purposes only. While every attempt has been made to verify the information provided in this report, neither the author(s) nor their affiliates/partners assume any responsibility for errors, inaccuracies or omissions. Any slights of people or organizations are unintentional. If advice concerning legal or related matters is needed, the services of a fully qualified professional should be sought. This report is not intended for use as a source of legal or accounting advice. You should be aware of any laws which govern business transactions or other business practices in your country and province. Any reference to any person or business whether living or dead is purely coincidental. We make every effort to ensure that we accurately represent the content and its potential for income. Earning and Income statements made by our company and its customers are supplied directly from the customer. There is no guarantee that you will make these levels of income and you accept the risk that the earnings and income statements differ by individual. As with any business, your results may vary, and will be based on your individual capacity, business experience, expertise, and level of desire. There are no guarantees concerning the level of success you may experience. The testimonials and examples used are not intended to represent or guarantee that anyone will achieve the same or similar results. Each individual's success depends on his or her background, dedication, desire and motivation. There is no assurance that examples of past earnings can be duplicated in the future. We cannot guarantee your future results and/or success. There are some unknown risks in business and on the internet that we cannot foresee which can reduce results. We are not responsible for your actions. The use of our information, products and services should be based on your own due diligence and you agree that our company is not liable for any success or failure of your business that is directly or indirectly related to the purchase and use of our information, products and services. Page 2
Foreword There is a lot to talk about this week, including our usual introductory notes we won t waste any time on small talk. Well, maybe a little time. Just a bit, promise! First, let s mention something about the delivery schedule of the lessons. As you probably know, email isn t an exact science. When we say, Lessons will arrive every 7 days that s the schedule and that s what we ve programmed into the sequence of lessons. (Just know that you WILL receive a lesson every week at some time.) However, there are a variety of scenarios (that we won t get into to save ourselves from technical jargon), which may cause a delay in you receiving the lesson. There are things that may cause a delay on our end with the software service we use and there are things that may cause a delay on your end with the email service provider. IF a lesson doesn t arrive exactly on the day you are expecting it, please don t panic. You WILL receive the lesson we promise! If you absolutely must have it that day and it cannot wait or bad things will happen (seriously, if it s a day off for you and you want the lesson on that day ) then email us at tomandnick@yourrockstarlife.com and we ll manually send you the link. Otherwise, please give it 48 hours past your expected time before you become concerned. If it doesn t arrive by then, certainly feel free to email me and we WILL get you the lesson. Read this -> Additionally, all lessons have download links for all of the previous lessons in the sequence. So, if for whatever reason you completely misplace something, check the current lesson (located on the last page of each PDF file) for links to anything you may have missed. ------------- Note: Most weekly lessons will be 2-5 pages in length (not including the cover page, legal page, and foreward) but the first 5 lessons will be a bit longer due to the setup details that are necessary to set the foundation together. Having said all of that, let s go ahead and get started Page 3
Introduction As we mentioned in last week s lesson, having a profitable real estate portfolio involves Four Pillars. Last week we examined Pillar #1, which was Preparation. In today s lesson we ll examine the second of the Four Pillars Of A Cash Flow Generating Real Estate Portfolio Pillar #2: Systems Today we re going to begin setting up the systems of your real estate business. Over the past several years we ve been fortunate to work directly with many investors. And this experience has proven to be very valuable to us. Many people believe they don t have what it takes to be a real estate investor. They don t have the know how or the courage to deal with the perceived issues that arise. However, watching literally more than 100 beginner investors over the past 36 months has shown us that, time after time, you can achieve success in real estate with some key ingredients. Let us explain Michael E. Gerber wrote a fantastic book, The E-Myth, which summarizes our findings beautifully. He explains that there is an Entrepreneurial Myth in existence. And that myth is the idea that anyone can go from nothing to running their own business. For example, the greatest home-based wedding cake maker in town decides that she would like to open up their own retail store. And she mistakenly believes that because she is a master cake maker she can build a business. We ve learned from direct experience in both our real estate investing business and running our own brokerage that there is a big difference between knowing how to do the work and building a business. And your real estate investing portfolio is very much like running an active business. And you must treat it like one. It s not enough to say, I am a real estate investor and then buy a property. Page 4
Before you throw yourself full force into building your real estate portfolio you must understand that you are starting down the path of running an active business. Anyone who claims that real estate investing generates purely passive income is not sharing the whole story. You can make it feel passive, and that requires the use of business systems. Real Estate Investing = An Active Business We regularly meet all walks of people who know they should get started but aren t sure where to begin. We ve boiled down why people feel this way to two things: 1. Commitment. 2. Systems. If you are looking to grow a sizeable real estate portfolio you must ask yourself this question: Are you up to it? And it s a difficult question to answer because you don t know what you have to be up to. Real estate has many twists and turns so it s almost impossible to define. So the better question is: Are you able to completely commit yourself to building an asset base that will produce ongoing income for yourself and leave a legacy on your behalf for years to come? If your answer is yes, and you are willing to trust the process (because real estate investing, like anything else, is a process), you are half way home! You need to trust that this journey will be a growing experience that, when done properly, will build a beautiful basket of golden eggs that will produce income for life. Once you ve made this commitment then the next part is laying down the systems that will get you there and having the discipline to follow them. Page 5
The Two Primary Systems You Must Develop And the two primary real estate business systems that you want to develop are: A) Property Acquisition - finding and acquiring properties that meet your criteria and fit your goals. B) Marketing a proven process to follow that generate tenant leads (also know as potential customers ) for your business. Most people complicate matters when they shouldn t. Creating a real estate portfolio is rather simple when you follow a system. Most of the task required for each are straightforward, let s cover them together step-by-step. Property Acquisition You want to get very clear on the type or types of property you want to specialize in. It s not good enough to call yourself a real estate investor. You want to become a specialist. In lesson two we covered that specialists are paid more than generalists. Remember our example of heart surgeons being paid more than general family practitioners? So you want to become a real estate specialist. Pick your property categories and become super knowledgeable about them. The key to this is select appropriate properties for your goals. There are some characteristics of investing that we want to quickly mention: ü Consider residential properties, both single family and multi-unit apartment buildings. There are a gazillion different types of real estate investments, many of which we covered together in Lesson Two, but the primary ones are broken into two categories: residential and commercial. The primary reasons for focusing on residential properties, at least initially, are this: they are the easiest properties to find, they are the easiest to finance, they are the easiest to market and they are the easiest to get professional help with. Page 6
STEP ONE: Finding Your Properties In Lesson Two we covered picking a fundamentally correct area to invest in. We focused on population trends, income levels and infrastructure developments. Once you have your area you want to develop a standard process and criteria for finding homes. For example, if you ve decided to focus on residential properties then you can use existing tools like http://www.realtor.ca that aggregate listings across Canada for anything that is six units or less. For residential multi-unit buildings greater than four units you can also use http://www.realtor.ca for your search. Instead of choosing the Residential Properties as you can see below, you would select Commercial Properties. Many investors mistakenly believe there is one system for all listed real estate properties. You should understand that real estate across Canada is organized Page 7
into Real Estate Boards. For example, The Kitchener Waterloo Real Estate Board or the Winnipeg Real Estate Board. Properties are listed for sale on the local real estate board and that data is shared with the http://www.realtor.ca system with a delay of about 48 hours or so. This means that you ll also want to develop a relationship with a local Realtor. Explain your goals and your criteria and have them email you a list of newly listed properties as they become available. Their real estate boards allow them to set up this type of notification for you without much hassle. Note: In two weeks we re going to get into much more detail about how to work with Realtors. Let s continue with our search. The next thing you want to do is put in the criteria you are looking for: On the day we ran this search here are how the results appeared: Page 8
From here we can quickly scan the properties on the right hand side and select any of them to get more detail. Here s A Big Tip For You Many people know that when looking at single-family homes we believe in the starter home category. This is the category of homes that always has the most interest, from renters and buyers. And we like to make sure all our investments are in demand so this category is the perfect place to invest into. In good economic times or poor economic times starter homes are always in demand. Housing is a need after all. Not a want. That s a big reason we re not believers of investing into high-end Trump Style real estate - at least not yet J - you may want to stick to bread and butter style homes as well. But we take this one step further and put a little twist on it: Page 9
We ve found that if you focus on the higher end of the starter home category you attract better tenants. Let s use our example city of Kitchener, Ontario. You can buy a starter town home for under $250,000. It s older, needs some work and isn t in a nice complex. But it qualifies as a starter home. However, if you acquire the higher end starter home then you appeal to people s emotions. Most people have a dream of living in their own home and the higher end of the starter home category appeals to that. So instead of buying a $245,000 townhome because that s the cheapest property in the category we usually acquire a $300,000 single family home. This does a few things: ü It separates us from other investors. Most investors want the cheapest property available. As a result there is often more competition for tenants in that category. With our property there is less competition because there are less investors spending slightly more for a nicer piece of real estate. ü We appeal to a tenant s emotions. There s nothing too appealing about a run down home. A nice property gets people excited. It makes the property easier to rent and ultimately it attracts better tenants. As a result we can charge more for the home so the tenants need to be able to pay a higher rent. Good homes attract good tenants. ü It strengthens our portfolio. With a good mix of nice single-family homes in our portfolio we have a strong asset base. They will rent out easily and we have a very clear and defined exit plan. We can sell them without much hassle. What About Multi-Unit Properties? This idea applies to other forms of property as well. For example, it is widely accepted with experienced multi-unit real estate investors that a building full of bachelor apartments doesn t attract stable tenants. Instead, a building full of two-bedroom apartments attracts a more stable tenant and as a result a more stable revenue stream. This type of building has move up the rent ladder to attract better tenants. Banks and mortgage insurers are also more willing to lend on buildings with a good ratio of two-bedroom apartments in the building. That alone should be instructive when you re making your investment decisions. Page 10
Bottom line: Once you ve selected the category of property you ll invest in choose the higher end of the category. You ll reduce competition and stand out from the crowd. Let s take a look at the commercial search for properties. When you select Commercial Properties on http://www.realtor.ca you re actually sent to another website: http://www.icx.ca In the Looking For drop down box we can select the type of commercial property we would like to search for. You ll find several commercial property selections to choose from. You can search on a specific city and select the price ranges of building that you re focused on. Let s take a look at a search for buildings in the $1,000,000 to $2,000,000 range in Edmonton, Alberta. Page 11
Here s what the search turned up: There s something else you should be aware of when focusing on Commercial Properties. Commercial properties, this includes multi-unit residential buildings over 6 units, are not always listed on the commercial area of http://www.icx.ca. In fact, it s estimated that only about 20% of them actually get listed in the regular fashion and find their way to http://www.icx.ca. So There is no one place to look for these buildings. These are often traded between commercial real estate brokerages and sold on an exclusive basis. This means that they are much harder to find but it can be done and we ll be covering this in greater detail. As you build your system for finding properties you ll want to be on the look out for niche commercial real estate brokerages that focus on your category of property. Page 12
For example, here s a brokerage in Toronto that has been specializing in multi-unit apartment buildings, http://www.skyviewrealty.com: OK, let s summarize this step: 1. Get familiar with http://www.realtor.ca and http://www.icx.ca 2. Start looking for Realtors who specialize on your property focus. Ask them to be put you on notification lists where you are emailed new properties regularly. Again, we ll cover working with Realtors in more detail shortly. 3. Begin searching for Commercial Brokerages in your area. They will hold the key to accessing the majority of commercial properties. You won t be able to depend on http://www.icx.ca alone. STEP TWO: Financing Your Properties Now, there are literally dozens and dozens of financing options available to you. So, what we want to give you are our personal recommendations. When you are planning your investments you will want to plan ahead. Some investing options Page 13
are good for two to three purchases but will be prohibitive after that. When you re beginning the best place to start is with a mortgage broker who works with investors. Make some phone calls and begin asking around. Meet with a few of them and outline your plan. How will you know if they are competent enough to work with you? Test them. Ask them these questions: 1. How much volume in mortgage business do they do annually? (If they do more than $50 Million they re doing enough business to likely understand how to work with investors from our experience anyway!) 2. What is their mortgage portfolio default ratio? (If it s really low like under 0.4% then they likely have mortgage underwriters that really like them and are willing to work with them aggressively.) Also, Get familiar with CMHC s Mortgage Insurance products available to real estate investors. Sometimes they have none and other times they have multiple ones. For the latest stuff you can poke around their website here: https://www.cmhc-schl.gc.ca/en/co/moloin/index.cfm Page 14
You can print off the 2-page document by accessing it here: http://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/upload/opims65630- CMHC-Income-Property-03-27-09.pdf Above you ll see the section of the document that details mortgage insurance premiums. Get very comfortable with these details so that when you speak with banks and mortgage brokers you can understand what they are offering you. Most banks in Canada will not offer high ratio mortgages in Canada (less than 20% down) because they only work with CMHC as their mortgage insurer. The other two companies that have on-again-off-again residential investment property mortgage products are http://www.genworth.ca and http://www.canadaguaranty.ca/. The reason you ll want to work with a good mortgage broker instead of just with a bank is they ll likely have access to the mortgage products from Genworth and Canada Guaranty (the Canadian arm of AIG). Just relying on your bank will limit your option. Even if all of these mortgage insurers have nothing great going for investors at the time you need them a good mortgage broker will likely have access to private lenders or Mortgage Investment Corporations (MICs) that may be another source of funds for you. Bottom Line: Spend the time to find a good, experienced mortgage broker. They may by your key to buying multiple properties. Page 15
What About Commercial Property Financing? The most widely available mortgage products are available for multi-unit apartment buildings. Both CMHC and the major banks consider these properties to be the least risky type of commercial investments. The reason? Stable source of revenue. Strip malls, office buildings and industrial space can have vacancies for months, even years at a time. Apartment buildings provide shelter, which as you know by now, is a need. It s a common myth that you must put down at least 25% to 35% to buy large multi-unit apartment buildings. That is not the case. CMHC has an excellent summary of their mortgage products available here: http://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/mupr/upload/multi-unit- Reference-Guide_March-2009_63885.pdf They will loan up to 85% of the value of the building. There are things like application fees and structural inspections that you ll have to pay for. Page 16
Down payments of 25% and higher are common for most other commercial real estate property types. Summary of this step: 1. You must keep abreast of the latest mortgage products and mortgage insurance. 2. Develop a long term relationship with a mortgage broker who can supplement your knowledge. Page 17
As a bonus, try and find a broker who has a large network of private money. This may come in handy when trying to refinance your properties. We ll dive into private money in an upcoming lesson. For now here s what you need to know: private money comes from individuals willing to lend you money against your property at higher loan-to-value ratios than the banks may be willing to. Bottom line: they re handy to extract equity without refinancing properties through the banks but they carry higher interest rates. Like all good things, they usually have a price. That s what we re going to cover today. As you grow as an investor your Finding and Financing should become a smooth part of your property acquisition systems. In 7 days we re going to cover Marketing. We ll dedicate the entire lesson to this step in building your systems. And you ll see how we can automate marketing with fantastic results. You ll love some of the tools we re going to share with you. Some of them we ve never shared before ever. For You Experienced Investors... We have a special treat for you coming up in 48-72 hours. A little unannounced bonus. It s something we ve used with amazing success over the past several years. Watch your inbox for it. And don t worry, since we can t tell who is a beginner and who is experienced, you will get this in your email inbox even if you re just starting out J. This Week s Assignment 1) Start searching. Check out properties on http://www.realtor.ca and http://www.icx.ca. Spend time on different property types so that you get familiar with how they are listed for sale. 2) Get notified. If you are focused on single-family homes reach out to a couple of local Realtors and get yourself on their email notification lists. If you are focused on commercial real estate build your database of local Page 18
commercial brokerages. Use Google.com to track down two or three in your area and put yourself on their email notification lists. 3) Understand Mortgage Products. Spend 15 minutes reviewing CMHC s website. In a short while you ll have a better understanding of investment mortgages than 95% of all bankers and brokers. To Your Success, Tom & Nick Karadza Publishers, Rock Star Reports Coming Up Next... After the announced bonus for experienced members is emailed to you in 48-72 hours we ll be moving to Lesson #4: Quick Start #3: Marketing In this lesson we ll take an in-depth look at the processes and tools we use to put your marketing on auto-pilot. This is going to be a great lesson for both beginners and experienced investors, so stay tuned! Previous Lessons Lesson #1 http://www.yourrockstarlife.com/members/1_how_to_create_a_lifetime_of_income.html Lesson #2 http://www.yourrockstarlife.com/members/rock_star_tnt.html Bonus Lesson http://www.yourrockstarlife.com/members/1_bonus_report_team_build.html Page 19