Manny Khoshbin’s Contrarian PlayBook by Manny Khoshbin
2020, book #30: “One way or another, your success depends on what is happening in the economy — and the degree to which you do your research and are able to interpret your findings will be a deciding factor in your success.” — Manny Khoshbin
Finished on May 11, 2020
I read this book with a good friend of mine. It was interesting and beneficial to be able to discuss it together and share the areas of the book that most impacted us. I learned a lot about the way that the author went about building his real estate portfolio and establishing the portfolio that he presently has. It’s commonly referred to that most millionaires get their wealth from real estate so I knew that I’d want to focus on learning more at some point in time.
Do your diligence. If you have any business or finance background, I’m sure that you’ve heard this more than once. Even if you don’t have that type of background, it may be familiar to you also. When you make decisions that have large ripples, it’s more likely to do the diligence that is needed for informed decision-making. When it comes to investing, though, many people will just say, “Oh that’s too risky for me.” And do NOTHING! That’s preposterous.
“I couldn’t play it safe, that’s way too risky for me.” — Russ Diemon
Pg. 39, Common sense will tell you why being attuned to economic fluctuations is essential to anyone who wants to become (or remain) wealthy, from real estate or any other investment vehicle. One way or another, your success depends on what is happening in the economy — and the degree to which you do your research and are able to interpret your findings will be a deciding factor in your success.
If you didn’t know about this, now you do. With the Biden administration in office now, there have been some preliminary conversations about removing this part of the code. Now, I personally don’t have any real estate investments at this time but I’d rather not see what would happen if this was actually removed.
Pg. 62, the term “1031 exchange” references Section 1031 of the Internal Revenue Code. As it pertains to real estate, Section 1031 allows you to defer paying tax on capital gains from the sale of an investment property by reinvesting those proceeds into another like-kind investment property of equal or greater value. As long as you keep reinvesting, you can potentially avoid paying taxes on your capital gains.
Super important. Something that you cannot do if you own the building personally and not through a business. I hope you’ll see how when many people say that, “Everyone needs an LLC,” this is just one reason why.
Pg. 63, In real estate, depreciation refers to the gradual loss of value of a building due to normal wear and tear. It is calculated off the assessed value of the building and is itemized as an expense on your income taxes. Itemizing depreciation as an expense reduces your taxable income and therefore increases your cash flow. With an income producing property, you can also deduct the depreciation of any capital improvements you make to the building.
Simple to understand, just take a pause and make sure we’re on the same going forward — that’s why I highlighted this section of the page.
Pg. 82, Know your property types:
Condo: A good start-up choice for someone who can’t afford a single-family residence
Single-Family Residence (SFR): Great pride of ownership, lots of financing options, and great upside
2–4 Unit Complex: If you can afford the down payment, this is the best entry-level investment
Again, simple but often overlooked. If it’s cheaper to simply replace a building, why would you ever invest in the one that’s already constructed?
Pg. 108, Criteria for Commercial Income Property:
Criterion #1: Priced at a Discount
Criterion #2: Priced Below Replacement Cost
Criterion #3: Potential for Adding Value
As is true with most types of investments — know your numbers. If we go into real estate investing, we need to know what occupancy levels make sense. And, if the occupancy levels are lower than they should be, we better be receiving a clear, crisp, and concise explanation as to why.
Pg. 110, Occupancy:
Apartment Buildings: When looking at apartment buildings, look for a building with a historical occupancy rate of around 70–80 percent.
Office Properties: The best buys are underperforming, and the ideal office property has an occupancy rate between 50 and 70 percent. This is the occupancy “sweet spot” and is a key factor in buying the right value-add property.
Industrial Properties: For industrial properties, you will be looking for an occupancy rate of 60–70 percent. Again, always be focused on the goal of finding a building where you can add occupancy, and therefore value.
Retail Properties: When looking at retail properties, you generally want to find one that has an occupancy rate between 70 and 80 percent. With retail properties, in particular, you need to keep in mind that what is considered to be “underperforming” varies from market to market.
The cornerstone of all numbers and figures. If the cap rate is too low, the likelihood of making money is greatly lessened. Cap rate too high? There could be a red flag, maybe the seller is hiding something. Regardless, we better learn our numbers and know our numbers, and then act on our numbers.
Pg. 112, Cap rate = Net Operating Income / Sales Price
The capitalization rate (cap rate) projects the future income of the property and is used to estimate the value of an income-producing property. Appraisers will assign a cap rate to a property by considering the cap rates of recently sold similar properties in the area. The cap rate is a good measure of value as it relates to a property’s income.
Important call-outs. As someone who has not invested in real estate up to this point, the comment on separately meter units was something I had not even really thought about. It makes a ton of sense though when it comes to utilities, that’s not something that is even remotely close unit to unit. One unit may cost $50 a month and another $250 a month.
Pg. 116, Additional Criteria for Apartment Buildings. There are two additional criteria to note about apartment buildings:
Criterion #1: Separately Metered for Utilities
This is not a minor issue. Some buildings are master metered for all utilities, meaning that you, as the landlord, are ultimately responsible for 100 percent of the utility costs.
Criterion #2: Good Unit Mix
A good unit mix will make a big difference. The right apartment building should have some 3 bedroom units and at least 70 percent of the units should be 2 bedroom units.
It’s the sales strategy 100%. Overpromise and overdeliver. When we are providing offers, no matter what level we are at, we will want to provide all levels of validation and readiness upfront. It’s a simple package that we would create and continue to update and refine over time. We want to show we are serious and beyond that, we want to be sure that we are in the best position to win the deal that we are seeking.
Pg. 128, A good initial offer will hit hard, but since you do not want your offer dismissed, when you hit ’em hard, remember to also establish your credibility. Giving the seller the confidence that you are a serious buyer with the ability to close will nearly always get your foot in the door.
Provide documents that show your investment experience and your financial readiness. Include your LOI (letter of intent) with a pre-approval letter from your lender, a brief bio, a schedule of your real estate holdings (Buyer’s Resume), references from brokers, a current savings account statement, and the first two pages of your most recent tax returns.
Another simple check. I think that I would even request this as I were going about putting an offer together. For a property that I’m particularly fond of but I’m unsure of just how much work it could need from anywhere in the tens of thousands to the hundreds of thousands, maybe I’d even look to pay 50% of a deep cleaning before putting forward an offer.
Pg. 157, Deep cleaning the interior and exterior will clearly reveal what your priorities should be in tackling more involved cosmetic changes, such as painting and recarpeting.
Love this. It’s totally contrarian to the status quo, but that’s the whole point of this book, right? To get success anywhere, you need to separate yourself from the competition and be different. When it comes to checking in with the people who are paying you, it only makes sense right? As a business, you would call your clients every now and then and stay in touch with them, why not do the same with your tenants? It’ll mean much more to them than it’ll cost you to implement.
Pg. 169, Another way to keep your tenants happy is to have the onsite management check-in with them on a monthly or twice-monthly basis, preferably in person, to make sure that all of their needs are being met. Most tenants are accustomed to never being contacted by the landlord unless they are late paying rent. Going out of your way to establish and maintain communication with your tenants will give you a very competitive edge as a landlord.
Go the extra mile and make it simple. Christmas cards can be done by an assistant or by a team. All that you have to do is ensure that it gets done. Put the process in place and let your high-quality team execute on the process.
Pg. 170, I always go out of my way to reach out to my tenants on the holidays; each year we send out chocolates and cards and hire a Christmas tree service to set up a tree in the lobby. You would be surprised how much of a difference something as simple as a box of chocolates can make! Go the extra mile to please your tenants, and it will pay off for you in many ways.
Logical, right? Always check your options and think about what makes the most sense and of course, what makes the most dollars.
Pg. 189, When the cost of borrowing is much lower than your cap rate, then financing is your best option — why not make money with the bank’s money?
We have to be aware of the ever-changing marketplaces that we operate within. Manny made this a point of emphasis early on in the book and then again at the end. Without knowing where the market is in the lifecycle, we put ourselves in a position to overpay. We need to see, like today in early 2021, that the cost of new construction is way too high. That means that existing homeowners who are looking to sell their properties will have an easier time finding people who are willing to pay a premium. It’s simple supply and demand in most cases but if you’re unaware of the current market state, you gain nothing.
Pg. 190, I knew that the real estate price increase had a cap; I also knew that once property values began to exceed replacement costs, the builders would start a building frenzy. That would mean more vacancies, due to the saturation of supply.
Rereading my notes here again reignited my desire and focus for real estate investment at some point in the future, and ideally near future. It’s time to get deeper into revenue generation so that I can focus on expanding the investment portfolio that I have. If you talk to different people, they are all going to recommend different things but, the facts are the facts, and real estate has created more millionaires than anything else. It will be particularly interesting to see how the rest of 2021 evolves and how long the grace period on evictions remains. Eventually, it seems inevitable that there will be a major major housing crash worse than the recession in 2009. While there is such a demand squeeze right now, the supply will likely be completely too much in the next few years — particularly in states where there has been great levels of emigration like California and New York. Again, though, I agree with most of the people who are deep into real estate that I’ve talked to — this administration will do all they can to postpone any type of a housing crash until after they are out of office so they are not seen as responsible. Regardless of what happens or what the situation is, there is always a deal to be had, it’s just time to find them.