Author name: Erion Shehaj

I help professionals achieve financial freedom through real estate so they can live life on their terms. The ideas I write about come from my 20+ years of experience as a real estate broker, investor, and guide. I’ve helped clients purchase over $300 million in real estate assets to build their wealth. More importantly, I’ve been through different economic cycles and watched patterns emerge. I know what works and what doesn’t for busy professionals with demanding careers. I consider it my job to cut through the noise, eliminate the overwhelming options, and present you with a clear, proven path forward. Too many successful people never achieve financial freedom because they’re paralyzed by options or chasing the next shiny strategy. I am originally from Albania, a rugged country on the Mediterranean sea in southern Europe. I came to the US as an exchange student in 1999 and was the first member of my family to go to college. I believe that we best appreciate opportunities by way of contrast. Growing up in a totalitarian and communist country was not easy – but it has also provided me with a unique perspective that I utilize to spot opportunities and help my clients apply to reach financial freedom. My work isn’t about get-rich-quick schemes or building “empires” that become second jobs. It’s about using real estate as a tool to engineer the life you truly want—where work becomes optional, time belongs to you, and your finances support your values rather than dictate your choices.

Why property taxes rise on your investment properties (and what to do about it)

Sometime in March, county appraisal districts across Texas have an epic party. There’s loud music, dancing, cake, party hats and party horns. Oh and they send out the new property tax appraisals to property owners.

Coincidentally, around the same time of the year, I receive numerous calls and text messages from clients. “Ouch”, “Getting killed over here” and “This is out of control” are some sentences that may be uttered.

I’m trying to make light of it, but truth be told ever increasing tax appraisals are no fun. They take a bigger bite out of your incoming rent and reduce your positive cashflow. On average, operating expenses account for 40% of incoming rent and property taxes account for 65% of operating expenses. Therefore, they’re the principal driver of those expenses. So when you have years like 2013-2015 where average property appraisals went up by 10-15% per year to track a similar appreciation in property value, the impact will be felt.

I wish I had a magic strategy that you could put to work and reduce your property taxes right away but unfortunately my supply of fairy dust is depleted. But I would like to offer some thoughts and tips on the subject.

Property appreciation and tax appraisal appreciation go hand in hand

Some real estate investors are focused primarily on cashflow while viewing appreciation as a welcome bonus. However, cashflow and appreciation don’t exist in a vacuum, they are interrelated and they impact each other. For instance, when property values rise (a welcome outcome for any investor) property tax appraisals rise and positive cashflow drops.…

Why property taxes rise on your investment properties (and what to do about it) Read Post »

The Freedom Formula: How to turn $244,000 into $1.4M in 14 years 

Today’s post is exciting for me to write primarily because of what it can do for investors that actually heed the advice.

Since the beginning of Investing Architect, I’ve argued that quality real estate purchased in the context of and according to a sound overarching long term strategy can alter an investor’s life in fundamental ways. Surely, it can have an impact in that investors financial life – namely her passive income and net worth. But that’s only part of the magic. Most importantly, through their financial impact they can offer what I believe most of us are truly after: The freedom and independence to craft a life well lived.

I have a Freedom Formula that I’d like to share with you:

 (Quality real estate + Strategy+ Discipline + Execution)^ Time = Freedom

The case study I’ll go over with you today is the “proof” of the validity of this formula. Let’s dive in the numbers.

Case Study

Suppose you were presented with an opportunity to invest in brand new small multifamily (4 units) properties in a new development in an established Texas market with impressive population growth and solid tenant demand with strong median household incomes to support your rents.

Case Study Investment numbers

Annual Income: $55,200 (4 units leased at $1,150 per month)

Total Operating Expenses: $22,563 (property taxes, insurance, management and repair reserves, vacancy provision)

Net Operating Income: $32,638 per year

Debt Service and Leasing Fees: $23,485 per year

Positive Cashflow: $9,152.64

Purchase price: $460,000

Cash to close: $122,000 (25% down payment plus closing costs)

Why Strategy matters

This is usually the point where first time readers get a puzzled look on their faces.…

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Forget the Nest Egg Approach: How to create retirement income, grow your net worth and leave a legacy

Take a good hard look at the Net Worth Timeline Comparison graph below:

Net Worth Timeline Comparison

It’s a colorful, damning indictment of the Nest Egg approach to retirement that an overwhelming majority of investors in the developed world follow.

Let me set the scene for you so the meaning of the graph can come into better focus: A very disciplined high net worth individual (over $1MM) with a six figure job income maxes out contributions to tax advantaged retirement accounts (401k) and college savings accounts. Her family lives well below their means so even after those contributions there is surplus income that is invested regularly in a taxable stock/mutual fund account (dollar cost averaging).

The return assumptions are the same shade of conservative we use on real estate investment projections. We are assuming that all accounts will average a 6% linear return annually and that stock markets don’t shed 40-50% of their value every 8-10 years. In addition, we’re also assuming that the surplus is invested without fail (continued discipline) in brokerage accounts. Finally, on the real estate side, we assume that property values track inflation (3% per year) and base income and expense projections on actual figures.

The first graph at the top illustrates the investor’s net worth projection should she follow the current investing path (securities) projected out over the next 50 or so years.

The second graph at the bottom illustrates the investor’s net worth projection if she followed our Blueprint strategy. Under the Blueprint strategy, she would utilize current investable capital plus a portion of the income surplus (60%) over the years to acquire and pay off quality income-producing real estate assets.…

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How to keep great Tenants without squeezing your margins

A little less than a year ago we got the hardest part right.

Like leasing Sherlock Holmes-es we pored over lease applications, ran countless credit checks, background checks, prior eviction checks, cross reference checks, written and verbal rental and employment verifications and found a great Tenant.

Over the course of the year, our predictions came true. The Tenants paid rent on time, took care of the property like it was their own and even went over an above to improve it without costing you a dime.

Captain Obvious shares benefits of lease renewals

Now the lease is nearing it’s end and it’s time to discuss renewal. We would love them to stay for another year and re-up each year going forward till the end of time. The reasons are obvious – If they renew:

  1. Zero vacancy for another year – This means the amount you had budgeted for vacancies in your cashflow analysis flows straight to your bottom line and who doesn’t like a “healthier” bottom line.
  2. Zero make ready for another year – No matter how great Tenants are, when they decide to move out there will be some make ready costs. Locks need to be rekeyed, carpets shampooed, paint touched up, landscaping trimmed, utilities turned on in the meantime etc. If they renew, no make ready is required so another WIN for us.
  3. Zero leasing commission for the year – When existing Tenants renew, we prepare the lease renewal paperwork free of charge – another perk we offer to our clients to thank them for their repeat business.
…

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The most amazing real estate deal of all time

Imagine for a moment that you just orchestrated the most amazing real estate deal of all time. This deal is so impressive Scorsese will make a movie about it with Di Caprio playing your part. People who aspire to become successful real estate investors will hold week-long case studies of this deal for years to come.

 

All the elements are present. Through world-class negotiating skills during purchase, you locked in so much equity it should be illegal. Price to rent ratio is in the low single digits so your property throws off cash like an ATM machine. And finally, the return on investment might make people think you’ve entered the loan shark business. A thing of beauty, a work of art.

And yet, I’ve got news for you. The most amazing real estate deal of all time, will NOT change your life.

Let’s run through the numbers of one such hypothetical scenario.

Suppose you were able to purchase a $250,000 property for $150,000 and secured six figures of built-in equity. No repairs are needed. The first week on the market you find a great Tenant willing to pay $2200 per month for a two-year lease on the property. Total operating expenses plus mortgage payments add up to $1400 per month leaving you with positive cash flow of $800 per month. Assuming a 35,000 capital investment that’s a 27% cash on cash return with an internal rate of return in the triple digits.

If you zero in on the numbers of such an amazing real estate deal, it’s pretty impressive.…

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How the oil market crash impacted the Houston real estate market

Every conversation I have with Investing Architect clients or prospective clients these days eventually veers into the impact the oil market crash has had on the real estate market in general and investment opportunities in particular. With all the dramatic media coverage on the topic their expectation is one of a Buyer’s market with increased opportunities both in terms of options (inventory) and better deals (lower prices).

When you look at the aggregate numbers (all price segments lumped into one figure) the market has handled the effects of the crash surprisingly well. For instance, in the last six months aggregate year over year property sales were flat in June, up 7% in May, down 2% in April, down 1% in March, flat in February and flat in January. Same story with the year over year average sales price that were flat in June, flat in May, down 1% in April, down 1.6% in March, flat in February and flat in January.

Home inventories are up double digits from last year year’s drought but still averaged 3.5 months – well into Seller’s market territory. Not exactly something to write home about which I guess is a good sign on the back of 50%+ price drop oil crash.

A Tale of Two Cities

But, the reality on the ground is much more nuanced than those numbers suggest. It reminds me of Dickens’ book “A Tale of Two Cities”: It was the best of times, it was the worst of times. When you look at the data through the prism of price segmentation you get a very different and much more accurate view of what’s going in the real estate market.…

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The Fermi Technique: How to analyze investment properties in under 5 minutes 

Over the last decade,  I have worked with many successful long term real estate investors. They have different personalities, different professions and often employ different strategies. But they all have one critical thing in common:

Successful long term real estate investors possess the ability to quickly and accurately “size up” a potential deal. 

If someone were to call you on the phone to offer you a potential real estate deal, would you know how to evaluate it quickly and accurately within 5 minutes?

If not, the technique I will share with you today will change that. It will allow you to analyze any long term real estate deal in 5 easy steps that fit in the back of an envelope.

The technique was developed by world-renowned Italian physicist Enrico Fermi. He created the world’s first nuclear reactor,  has been called the “architect of the atomic bomb” and had a substantial role on the Manhattan project. So, in a nutshell a brilliant fellow.  Fermi was known to use his technique to get quick and accurate answers to very complex physics problems on the back of an envelope. Today, I’ll show you how to use the same methodology, to solve a much easier problem: How to analyze a real estate deal in under 5 minutes on the back of an envelope.

Let’s dive right in. Someone calls you and tells you about a potential investment opportunity.

It’s a single family home that would make a great investment property – according to the caller.…

The Fermi Technique: How to analyze investment properties in under 5 minutes  Read Post »

5 Critical Real Estate Investing Lessons I learned in 2015

Today is the last day of 2015. In a few hours, the bubbly will flow and we get to write a new chapter. That’s why this is the best time to reflect back on the year that was, learn the critical investing lessons it taught us and become better investors in the process.

Year in Review

Real estate markets across Texas entered 2015 with a lot of momentum from the previous year but one giant “elephant in the room”. Oil prices had dropped by 50% at the end of 2014 and everyone questioned how it would impact the labor and real estate markets. And nowhere were these questions as loud as in our home base of Houston – the energy capital of the world.

In “Why did oil prices drop in 2014” published here in February, I offered my take on the impact it would have on our real estate market. The central thesis of that article was that oil prices would certainly have an impact as expected layoffs would affect housing demand, but it would not lead to significantly lower real estate prices in 2015.

After a somewhat nervous start in January, the Houston real estate market didn’t miss a beat and resumed the “song” it had been singing over the last 24 months. The spring and summer seasons swept in and brought with them bidding wars, multiple offers, rising prices. Move on, nothing new to see here.

On the rental market front, it was the same story. High tenant demand, low days on market and multiple applications.…

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Investing Architect explores DFW

Over the years, I’ve been asked by several long time clients about investing in the Dallas Fort-Worth market. At the time, the main reason for their interest was location diversification. While I always thought it a good idea to diversify holdings over markets with different characteristics, I thought there wasn’t a significant difference in location characteristics to achieve any meaningful diversification.

Then oil prices dropped in the $40s and calls about investing in DFW became more frequent. Now the equation has changed from “hey, let’s invest in another city” to “Dallas is Texas growth with less ties to the oil business”. The case for diversification took a whole another dimension. So, I decided to explore the DFW market in greater detail to see if there were any investment opportunities there for our clients. And since nothing beats “boots on the ground” I made the drive north on Interstate 45 and spent a few days exploring different areas, looking at properties and trying to get a feel for the state of the market.

IMG_2147

The Process (of elimination)

Before I discuss my findings and impressions of the DFW market, I would like to take some time to explain our methodical process for assessing a new market. This would be very helpful to you if you’re considering investing your hard earned capital in a new market. My process for assessing a new market can be summed up in two steps:

  1. Focus your attention on the areas that fit the criteria
  2. Analyze those areas at a deep level

The first step is crucial especially when you’re analyzing two very large metroplexes like Dallas and Fort Worth.…

Investing Architect explores DFW Read Post »

How to compound real estate investing results with a little extra effort

If I could show you a way to compound your real estate investing results by investing a little extra effort over time, would you be interested? I know it sounds too good to be true but lend me your mind for a short while and I’ll explain exactly what I mean.

For the past couple of weeks I have been reading Darren Hardy’s fantastic book “The Compound Effect”. Darren is a protege of the late Jim Rohn whose teachings have had a great influence on me. (I like to think of Jim as a great mentor I never got to meet). In the last chapter of the book called Acceleration, the author talks about a simple but powerful concept that I find fascinating:

Real growth and acceleration in results happens when you apply a little extra effort after you have done the best you can do.

Let that sink in for a minute and reflect on it – It’s true and relevant in all areas of life.  But it’s especially powerful in long term real estate investing. Let us consider a couple of common scenarios where a little extra effort can compound your results.

Saving a little extra

Imagine you are Jackie – through hard work and determination you have managed to climb the career ladder and now you earn a great salary. You could switch cars every other year or spend it all on the latest tech toys. But you don’t. Instead you’ve chosen a path of living below your means and are able to save $3,000 per month after all expenses.…

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