Book Summary: Manny Khoshbin’s Contrarian Playbook (Part 3)

Stay In The Game!

This is part 3 of the Contrarian Playbook summary.  I hope you have enjoyed reading Part 1 and Part 2, if not click on the links and read those first!  In Part 3 Manny discusses what to do now that you own a property.  His main piece of advice is to stay in the game.  Don’t lose sight of your goals no matter what happens.  He starts off this section of the book telling the reader about some important life lessons he has come across in his real estate career.

Manny’s seven lessons are as follows…

  • Live it!
  • Believe in yourself
  • Be persistent
  • Don’t be afraid of failing
  • Keep learning
  • Don’t be afraid to ask
  • Stay Active!

Basically, these are all lessons Manny learned before he started his real estate career.  For example, Manny was in an immigrant who spoke no English when he first came to America.  Every day he spent three hours learning English, believing in himself, and achieving his first milestone in his career.  Being fluent in English.  Another lesson was about not being afraid to fail.  As a senior in high school, Manny saw an opportunity to sell dried fruit and nuts door to door.  He noticed that he could compete with local supermarket prices and quickly grew his company to 5 employees making about $4,000 a month.  Unfortunately, he was forced to close down his business by the health department. Although Manny never gave up and continued to be persistent until he asked a gentleman driving a Porsche on how he became successful.  Soon he had a job and a real estate license, and the rest is history.

9. Add Value To Your Property

The Value of Potential

Now remembering that you are a contrarian will put you in a position of advantage for success.  Think about it this way.  A majority of real estate investors want to buy the beautiful, stable, income-generating properties and never look at the slightly run-down properties that need some work.  You as the contrarian know that those rundown houses are the best buy!  Instead of buying a swan, you would want to buy the “ugly” duckling and watch/help it grow into a beautiful swan.  This is what contrarians do.  They then sell their swan to the average real estate investor who is super happy to buy a property he/she doesn’t have to do any work too.

So that leads us to the three ways Manny adds value to the property…

#1 Make Cosmetic Improvements

The right property has major potential for cosmetic improvement, allowing you to add value by making positive changes to the building and grounds.  This should start as soon as you close escrow.  The quicker you can make these changes the quicker you will be able to act fast and sell high if the market presents that corrects deal.  Even if you have to wait several years you can still benefit from these improvements by generating a larger cash flow.

A contrarian knows that to get the best ROI on a property is to buy the distressed properties that no one wants.  Some simple but huge cosmetic improvements are things like getting the exterior power washing, cleaning up the surrounding landscape, deep cleaning the interior, adding mirrors, ripping out and replacing the carpets, and possibly repainting the building.  For some of the interior changes, it is best to start with the vacant units.  You can do other little adjustments such as standardizing all the light fixtures, switch/outlet covers, and door hardware is subtle changes that can go a long way.

Overall these changes will boost the morale of the existing tenants and inspire them to renew their lease when time is up.  What this shows is you are a hands-on owner and care about the property.  Lastly, as stated above, the average real estate investor is now looking at your spruced up property.  It’s beautiful, cleaned up, and fully leased.  This is exactly what average investors want and you’ll be able to sell your property for a profit after 2-3 years of owning it!

#2 Lease Up (Fill Vacancies)

The right property has underperforming occupancy so that you can create value by leasing out the vacant units and increasing revenue.  Off the bat, you can fully lease the building to earn significant cash flow into your pocket.  This will create an environment for you where you can hold the building for extended years and not worry about losing money since the building is fully leased.  Now the trick is how do you lease a rundown building that the normal business folk never even bothered to look at?  Here are a couple of Manny’s ideas…

  • Advertise in the local newspaper
  • Advertise on Loopnet and Costar (real estate websites)
  • Hang a large banner on the building saying “Under New Ownership”
  • Incentivize possible tenants, give to get!
    • Something like, sign a 3-year lease now and get the first 6 months rent-free!
  • Mail fliers to the surrounding buildings

It is important to remember that since you go the property at such a great discount you can have below-market rents.  Manny even stated that he has offered half market rent the first year and then slowly bumped rent up the second and third year, all while maintaining competitive rent in the market.  Now don’t have too low of rent because then you will have issues selling the property.  But it is all about reeling in tenants and keeping them happy in the units.  This will bring you consistent cash flow.

You can also advertise on-site management.  Just in case a prospective tenant walks by and wants to see the units.  Therefore, either you or a paid employee is on-site and can walk someone through the property.  Another idea is if the building has what is called “dead space” you can turn it into a storage room and have tenants pay a couple bucks a month to have extra storage space in the building.  You have to think outside the box and find ways to make money, money is a tool to learn how to use it!

Lastly, you can offer a tenant an upgrade in their unit if they are choosing to move out or are having trouble deciding to renew the rent.  You can ask them what needs improvement in their specific units such as a new carpet or a new AC unit.  By extending your tenant’s leases you fatten up the properties NOI, making your property more attractive to potential buyers.

#3 Reduce Operating Expenses

The right property has cash flow, but ideally just enough to cover its expenses.  This is so that you can add value by cutting expenses and making operations more efficient.  Ideal you want to purchase buildings with mismanaged teams.  You can identify this by looking at the comparables from other local residential properties.  The bulk of expenses are fixed.  Such as payroll for property management, insurance, and property tax.  But expenses such as utilities and janitorial expenses can fluctuate.

A major way to keep expenses low is to reduce payroll by keeping property management in house.  Ideally, you can be the manager and pay no one.  But with a growing real estate portfolio sooner or later it will all become too much to manage and you’ll need assistance.  Maybe work out a deal with a coworker or a tenant to help manage the property for a lower rent.

Next comes expenses when fixing up the building.  Manny recommends finding a company for each project and to use that company every time.  Befriend the employees and the owner.  Develop a strong relationship with them and consolidate their services as much as possible.  If you find one business that can do it all and produce good quality work, then look no further! This will help you have lower expenses and will help the company get more business.

Lastly, Manny covers insurance rates and property tax.  For insurance rates, you will want to bid out the contact every year to ensure you get the best deal possible.  Property tax varies per state.  So this is where hiring a law firm to keep you update to date on new tax laws or loops holes will go a long way in cutting expenses.

10. Actively Manage Your Property

In this short chapter, Manny sums up the importance of being a good landlord.  To build a truly successful real estate portfolio it is essential to be personally involved in the management of your properties.  On the plus side, keeping your management team, or yourself, in the building will lower costs and will keep you fully aware of what goes on in your property.

Tenants love nothing more than responsiveness.  By living in the building or having your management team in the building a tenant will be able to address their problems face to face.  Instead of calling your office building and listing to your answering machine.  Another benefit of having on-site management is that you will be able to fully lease your property much easier!

One of the first few things Manny does when he purchases a new building is to send an introductory letter to all the tenants.  He also sends a questionnaire asking what the tenant likes or doesn’t like about the property and what would the tenants like to see change that the previous owner didn’t act on.  Manny also stresses the importance of monthly in-person check-ups.  Most tenants only see their landlord went their rent is late so visiting them monthly to check up on them is a great gesture.  Also, celebrate the holidays in the building.  Purchase a Christmas tree for the lobby, hang up some lights, and send your tenants some chocolates.  You can’t go wrong treating your tenants like family.

The next point Manny talks about is treating your tenants like your parents.  Don’t count every nickel and dime coming from your tenants.  Remember that the contrarian real estate investors know that giving to get is the best bet.  For instance, when a tenant is looking to move out when their lease expires, try to find out what their motive is.  Are they financially burdened? Offer them a lower rent but extended lease (an extra 6 months).  If their concerns are more material offer them a new AC unit or carpet, in exchange for a longer lease.

Longer leases with the same tenants can add great value to your property when it comes time to sell! And since you will most likely be holding your property through a market decline, take the time to build that landlord-tenant relationship.  Each unit is different and will require different needs.  As a landlord, you need to make the tenants feel welcome and wanted in your property.

11. Actively Manage Your Portfolio

To build a strong real estate portfolio, you need to master the art of buying, selling, and holding.  In this chapter, Manny mainly focuses on the selling and holding aspects of real estate since the majority of the book talks about the buying part.  Even though Manny spends almost two-thirds of the book talking about the buy, it doesn’t mean the selling and holding period aren’t as important.  In fact, they are just as important and can also make or break your portfolio.

While reading this chapter I made a lot of connections to the stock market.  A big question I ask myself or I hear from other investors is “When should I sell?” or “Do I hold or sell?”.  Manny brings up a great point that I have heard from other millionaires I have spoken too. Don’t get greedy and don’t be fearful.  Too many investors hold too long and miss the peak selling point because they are too greedy and want more.  And some are fearful of losing what they have worked so hard for that they get comfortable and stop growing their portfolios.

As a contrarian, we want to maintain the position of an active investor.  This means we are always looking for the next deal.  It’s not about maximizing profits and perfectly timing the market.  When you are happy with your returns and start to see the market bid on your properties.  SELL.  Take your profits and pour it into the next deal and grow your money even more.  This process of buying and selling properties in a year 2-4 year window year after year after year is the only way you can reach that goal of a $100 million portfolio.

Liquidity is Essential

An active investor knows liquidity is a prime factor in growing their portfolio.  This allows you to leverage the properties you own into buying more properties and increasing profits.  The two kings to liquidity are cash and your properties.

Cash on Hand

The worst thing you can do as a real estate investor is spend all your cash.  This is the easiest way to miss out on the numerous opportunities in the ever-changing cycles of real estate.  Cash is a tool.  You will be able to achieve your long term goals much faster with cash on hand.

Let Your Properties Work for You

There are two ways your properties can provide liquidity for you.  First, you can sell your property and second, you can refinance your property.  Never refinance your property during a recession.  Manny prefers to sell a property for cash rather than getting your property refinanced.  Refinancing can be difficult in times of a recession to get cash on hand, therefore, as stated before, never spend all your cash.

For most beginners liquidity can be an issue, but never sell your property for a loss.  If you followed Play #5 correctly, your property should be paying for itself and you should be able to weather recessions regardless of your refinance options, or lack thereof.

Sell High – Just Do It!

Timing is everything.  When the market is up you want to sell and collect your profits.  When the market is down you want to hold the properties you have, add value to them, and fully lease them for income.

Selling Like a Contrarian

It is important to remember that having the resources to buy other properties may be more fruitful than worrying about a little more profit on a particular sale.  In the end, the goal is to compound your profits over time.  Not make all the money in one sell, but many sales throughout your real estate career.

Timing the Market: Test the Waters

Let’s say you have a 4 unit plex which you bought in a recession that was only 75% occupancy.  You have owned it for a year and a half, you have taken the time and effort to fully lease the property and make cosmetic improvements.  You also increase the rent by $100 a month making that $4,800 increase over a year.  You now feel your ugly duckling has become that swan and is ready to sell.  How do you test the waters?

A good way to test the waters on when to sell is to put your property on the market.  Manny says he likes to put it up for 5% over the last comparable.  If buyers are lowballing you then it’s probably smart to not sell and take your property off the market.  Just hold the property and keep collecting income.  BUT, if a bidding war starts to happen on your property and buyers are willing to purchase your property 10%, 15%, or even 20% above your asking price, then it is time to SELL!!

Give to Get

Same deal as when buying a property.  If you buy like a contrarian then you need to sell like a contrarian.  A normal buyer will do similar checks on the property just like you and will dig out data to negotiate for a lower price.  JUST SELL.  Obviously don’t low ball your property but when someone is interested in buying don’t lose sight of the main goal.  Which is using your profits to buy a bigger, better, higher-income generating property!

Know-How to Hold

Lastly, Manny wraps up this chapter discussing the importance of holding.  As a contrarian, you shouldn’t be sitting on your hands waiting for the next buyer to stumble across your portfolio.  Take the time to add value to your properties, leasing them out, expand your portfolio to more apartment complexes, and streamline your operating expenses.

Obviously, there are so many parts to a real estate portfolio.  That’s why there are so few people who excel at it.  Simply put, don’t underestimate any part of the process.  Real estate is an ever-changing playing field where you can make money on the buy, sell, or holding period.  A contrarian knows how to make their property work for them in all three parts of the process.

12. Expand Your Horizons

Wow, after reading this chapter I now understand why Manny is considered one of the best Commerical Real Estate investors.  His timing is impeccable and his sixth sense of smelling a growing market is amazing.  This chapter truly defines the concept of being a contrarian investor.

To begin Manny states that to put yourself on the fast track you want to look at all 50 states.  Each state has its own economy but all states follow the 1031 exchange rule.  Therefore you can grow your initial investment throughout America.  That being said having 50 different economies means having 50 different positions in the real estate cycle.  And since you can carry your 1031 exchange from say California to Arizona, like Manny and many other investors, you will want to expand your horizon outside your state.

Manny comments on residential properties being very management intensive.  So if you plan on taking the leap to out of state purchases you will want to focus on commercial real estate and start by investing in neighboring states.

In this final chapter Manny simply sums up his real estate career and how he used real estate cycles to his advantage.  For example, Manny started in California since that’s where he lived.  When he noticed prices were getting to high so he looked to neighboring states.  Knowing that California investors were soon going to start looking to pour their 1031 exchange into new properties outside of California.  Manny purchased properties in Arizona and then 1-2 three years later profited off these properties buy selling to California investors.

Manny then went on to purchase properties in Texas, North Carolina, Ohio, Pennsylvania, and back to California and Texas all off websites like Loopnet and MLS.  In the years 2004-2007 Manny bought and sold over $400 million dollars of real estate. He also capitalized on the 2008 housing crisis in America buying purchasing 90 residential houses in Santa Ana, California.

Obviously, we are no Manny Khoshbin, but who says we can’t learn a thing or two and create wealth we never even dreamed of.  In the closing remarks, Manny wanted to remind his readers that you can’t wait for the weatherman to give you the forecast, just look outside the window.  What the weather doesn’t want you to know is that these days common sense and the internet can get you just about anywhere.

Bottom Disclaimer: To those who read the book and noticed I left out parts pertaining to commercial real estate and are disappointed about it… Commercial real estate comes after a solid base is created in residential properties.  Therefore, since I am a beginner, I skipped those chapters and will come back when the time is right.

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