January 2016

Going from lawyer to full-time real estate entrepreneur was tough.  Here's how I did it. Trading My Life for Money I practiced law for 12 years. I worked 14-hour days, ate every meal at my desk, and worked most weekends. Sometimes I went a month without a day off. I ate terribly, got fat, and felt miserable. I hardly dated or saw friends. My life consisted of eating, working, and sleeping (very little). The money was good. But my “Sunday night blues” started on Friday night. I wasn’t just trading time for money, I was trading away my life. Why was I working so hard? So my faceless billion-dollar corporate could fight over millions of dollars with another faceless billion-dollar corporation. And, right before trial, they'd always exchange some money and settle.  The client would go right back to doing business with the enemy.  I'd have just wasted three years of my life. And, for what? To make partner? Yeah, right. Law firm partners don’t like to dilute their profits. And even if you make partner, then what? You work just as hard as the associates, except now you have to bring in business too. The pressure never stops.  You have to feed the machine clients or it stops dead. I tried to escape several times. I walked off the job with no plan. I just needed out. But, with no plan, I would drift back into law. I even went back to school for two years. Then I met my wife and returned to law for the money. But law firm life nearly destroyed my marriage. In 2008, the Great Recession hit. I was grateful to have a job. But the work dried up, and as it did, my stress level rose. I surfed the Internet all day, dreading a knock on the door that meant someone was firing me or bringing me work. I could not decide which was worse. Breaking In Nearly Broke Me In early 2011, my firm got tired of paying me to surf the Internet and let me go. I was more relieved than upset. But the idea of interviewing for another law job made my stomach turn. I had to make a change. I’d always been interested in real estate. A friend and I had looked at properties together but had not made any offers. I started looking into real estate as a career. But, because of the recession, I was competing with guys out on the street with years of experience. I stood no chance. One day, a very experienced real estate hand sat me down over coffee. “Look,” he said. “I’ll tell it to you straight. At your age [42], and with your background, no one in this city is going to hire you. The only way you’re going to break into this field is if someone just takes a liking to you and offers to make you their partner.” Unbelievably, a few weeks later, that happened. I had been networking with everyone I could in real estate. I met a woman who owned property with her husband and wanted make real estate a business. She asked me to join her. “This isn’t rocket science. You’re smart. You can learn it,” she told me. “And, you have integrity. I can trust you. That’s most important.” She also thought I could raise money. She must have had some kind of second-sight. I was not sure whether to accept her offer, so I asked some close friends for advice. Two of them told me that, if I accepted the offer, they would invest money with us. And the amounts they mentioned were substantial. So, having a partnership offer and two investors in hand, I decided to go for it. It was not easy. It took us more than a year to find our first deal. Then we found another from the same seller. But after we had spent money on due diligence costs, travel, legal fees, lender fees, etc., the lender backed out of one deal and we terminated the other. We lost months of work and tens of thousands of dollars each. And I was supporting my family out of savings at the time. We decided to break up the partnership. We’d had some disagreements over strategy and decided at this point it was best to go our separate ways. After Three Tough Years, Success at Last Now what? I wondered. A few weeks later, I was having dinner with one of my investors. I said I might have to go back into law. He said not to be hasty and then suggested that we form our own venture. In early 2013, we founded Two Bridges Asset Management LLC. It took a year to get any traction. But by 2015, we had four properties in our portfolio, comprising 404 apartments, worth nearly $20 million.  Now we're planning to raise our first investment fund. What enabled me to leap from miserable lawyer to full-time real estate entrepreneur? I exercised a high degree of professionalism, which I learned as a lawyer I established a reputation for intelligence, integrity and trustworthiness I networked actively with people in the industry and followed their advice I absorbed the losses personally when our deals went bad, rather than look to our investors, demonstrating integrity and commitment to the business I kept moving forward in the face of setbacks I said yes to opportunity when it came my way If you are committed to a career in real estate, and you develop these traits, too, you can free yourself from the corporate grind. I did it. So can you....

Landlords get starry-eyed when rents are going up. Rising rents signify strong apartment demand and can bring in higher revenues. How could they possibly ruin your bottom line? It all depends on how you’re implementing rent increases. When vacancy results from normal turnover – the tenant takes a faraway job or experiences a life change like marriage, etc. – you should certainly charge the next tenant whatever the market will bear. But what about an existing tenant who wants to renew the lease? That question is harder. You want to keep pace with the market, and you need to offset rising expenses. But increasing the rents too aggressively might cause a tenant to move out. If the tenant is a headache, this might be a good thing. And even if the tenant is a good one, if the current rent is far enough below market, then you might benefit from renting to someone new. But the current rent must be very far below market to justify losing a good tenant. Otherwise, the new rents won’t recoup the costs of vacancy for a very long time. Vacancy Costs You More Than Just Lost Rental Income How does this work in practice? When a tenant leaves, you incur several costs. Obviously, there’s lost rent. Then add in “turn” costs; incidental costs, like utilities reverting to the landlord; and unanticipated costs that can arise when apartments are uninhabited. For example, imagine your tenant pays $700 in rent – 5{c8cadb6b157e97ed0bdc6df9c01b7d60fb42806e70d6a9acb324c508125f4e61} below the market rate of $735. Assume it takes 30 days to turn and re-rent an apartment, a soft turn (painting, carpet cleaning, and light repairs) costs $400 a unit, and utilities cost $25 a month. In this scenario, if the tenant moves out, you lose $1,125 from your bottom line. At $35/month in increased rents, it would take 32 months – nearly 3 years – to make up the loss! Even if the original rent was 10{c8cadb6b157e97ed0bdc6df9c01b7d60fb42806e70d6a9acb324c508125f4e61} ($70) below market, the gap wouldn’t fill for 16 months. Then imagine it’s a harder turn, where you must replace the carpet for $1000 rather than clean it for $100. Your total cost is now $2,205, which would take you a shocking six years to make up if the rents were only 5{c8cadb6b157e97ed0bdc6df9c01b7d60fb42806e70d6a9acb324c508125f4e61} below market! Now multiply this across several units in your property, and you can see why rising rents can destroy your bottom line if you’re not careful. Bad Things Can Happen in Uninhabited Apartments And these costs are not the only ones that can result from vacancies. Bad things can happen when no tenant is present to report problems to management. In cold weather, pipes can freeze and cause flooding. In hot weather, unnoticed leaks can cause mold outbreaks, which can quickly overtake an apartment. Remediation costs can wipe out a whole year’s rent, not even counting rent lost during renovations. The lesson is to be judicious when raising rents. Work hard to retain good tenants. Raising rents only 2.5{c8cadb6b157e97ed0bdc6df9c01b7d60fb42806e70d6a9acb324c508125f4e61} to keep one in place will add $210 in annual revenue versus $1,125 in vacancy costs, a difference of $1,335 to your bottom line. It could even make sense to renew the lease at the original rent, if the alternative is the tenant moving out. Normal turnover and natural vacancy are facts of life in the apartment rental business. Good operators budget adequately for these costs. But good operators also know that the key to maximizing profits is minimizing unnecessary turnover and its associated costs....