Invest in Portland

As someone who has worked hard for your money and investments, you need to know what questions to ask your financial advisor. It’s not enough to simply put your money into another person’s hands without first understanding who the person is and how he or she works. Any financial professional you work with should be willing to answer your questions and be happy to take the time you need to clarify your options and the market.

Knowing which questions are the most important will help you maximize your time and the potential of your wealth.

- The first thing to remember is that there are no dumb questions. We’ve all heard this before, but the financial market is complicated, and this is your future, after all. Ask questions, seek answers, and take an active part in your relationship with the professional you hire. He or she should know your goals and your comfort levels and work to keep you within both. As such, perhaps the most important question you can ask your financial advisor is if a recommended opportunity fits with your individual investment goals. Are you looking for long term investments or a quick turn around? The longer an investment takes, the more likely it is that you will see a return. Short-term investing can be riskier, but it can also lead to quicker profits. Both are viable options, depending on your personal level of risk tolerance.

- Another important question you should ask your financial advisor is how the investment will make money. Will it pay dividends, or will it give you interest? What has to happen in order for the investment to start turning a profit? Also, what fees are involved with the investment? If there are fees to purchase, maintain, or later sell the investment, you need to know this upfront so you can plan for the costs. Having the full picture of an investment will prevent surprises down the road and help you better manage your money.

- You also need to know how to research the investment opportunity. While you will have many questions for your investment advisor about the strength of the investment, you should also ask how to obtain information about it from other legitimate sources. No matter how qualified your financial advisor is, virtually no investments are guaranteed, and other experts may be able to offer you more information to help you make the decision.

An investment planner is a great resource, and you should take full advantage of his or her knowledge. There are many questions you can ask your financial advisor to get the most out of an investment opportunity. No matter how new you are to investing, your planner should treat all of your questions with respect and take the time to make sure you fully understand where you are putting your money. Your wealth can give you a safe future, and it deserves to be in good hands.

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Financial advisors are the quarter backs in the vast area of money management. They see the entire field and know the best play or strategy to run given your current circumstances. They can assess your overall financial picture with an eye on your investments, savings, debts, insurance, and other big areas of your money life. Some are equipped to offer estate and business planning advice or even provide input on your tax situation. Many make investment recommendations, such as mutual funds or even specific stocks. The most competent advisors can objectively put your finances into context and help you arrive at the best money moves to help you create your future and protect your present.

A financial advisor can help you answer questions ranging from “should I refinance my house?” to “how do I handle these stock options?” Most advisors can answer specific questions, organize and orient your overall financial picture, shed light on budget realities and provide tips to reduce or control spending, assess your retirement savings, furnish a much-needed wake-up call regarding your debt or savings relative to your personal goals, check to be sure you have all of the basic insurance you need and whether there are other holes in your financial plan, provide investment recommendations and, if advanced, they will understand how to structure your estate and business for protection, distribution and taxes.

But just knowing what they can do, how do you find the advisor that knows how to properly execute a financial plan? A great financial plan should address all the appropriate and significant issues relative to your personal situation. And your plan should be designed in a manner that, in the end, reduces your overall stress level about your money and helps you feel good not only about your finances, but the life you have, or are in the process of creating.

So how do you find and evaluate an advisor to know if they will be a great fit for you? The following four major questions will give you a good start. Who knows, you may think of some things to ask yourself.

1. Do you provide references?

-These should be real people who are current clients with real phone numbers.
-Ideally you want to have three current clients and two professionals outside the industry (i.e. attorney, CPA, real estate broker, etc.).
-Important: Call the references!

2. How are you compensated?

• If they do not charge fees for their service, ask what companies they represent and if they get extra commissions or other bonuses for selling one company’s products over another.

-No one works for free, so if they are not charging fees, they must be paid on commission from the products you purchase from them. Find out what companies they represent, or if they must only offer products from the company they work for (this can really limit your options for objectivity).

• If they do not charge fees, ask them how you can be sure that the advice they will provide is in your best interests.

-How do they objectively analyze your situation and what is the process they go through to arrive at their recommendations for your situation.

-They should at least get a detailed understanding of your income, assets, debts, company benefits, etc. Finally, they should work up an action plan that addresses all of your concerns, and gives you choices. Choices of the different ways your concerns can be handled, with the pros and cons of each choice.

• Ask if they sell products as well as provide financial planning advice.

-If the advisor says “yes”, this should not be taken as a negative response. However, you should recognize the potential conflict of interest that exists.

-You must ask the planner if they have any special incentives or reasons to sell you the things they are proposing. Ask if the products they recommend to implement your plan will be compared so you know the different options of that particular product type, or if they will only show you one product for each recommendation. If the motivation is to get you what you need, that is fine!

- What you want to hear is that they do in fact, sell products they recommend in their plans, but they have a number of companies they work with to implement the advice in the plans, and that they will provide you with the information on the different products and companies only AFTER you have reviewed the plan and agree with the planning suggestions.

• If there is a planning fee, ask how it is calculated, and how much of the fee must be paid in advance.

-Ask if the fees are flat fees covering a whole 12 months, for example, or if they are calculated on an hourly basis.

- In most cases, you are usually better off working with an advisor who charges their planning fees on a flat basis, no matter how many hours they spend creating your personal plan.

- Typically, you will pay 50% of the fee up front, paying the balance upon completion of the plan. This assures that in most instances, that the job will be finished to your satisfaction.

• Ask the advisor if they charge fees for managing some or all of your money, instead of, or in addition to planning fees and product sales commissions.

- In most cases, the money management fee only applies to the funds they are investing for you.

- Also, you may be able to incorporate outside investments or assets that the advisor does not directly manage like your 401k or retirement plans to be included in the fee at no extra cost to you.

• Finally, ask them if they give the same advice or product recommendation to all their clients!

- Buying financial products without a plan is like having surgery without an exam. This person most likely isn’t a planner, but a product sales person.

3. What are your qualifications?

• How long have you been in the profession?

- If you have significant income and/or assets, you should be working with an advisor that has a least 10 to 15 years experience. Someone that has ridden out at least one or two economic downturns or bear markets.

• What is your past education?

- Do you have a college degree in your area of expertise? What professional designations do you have and how do they apply to your work for me?

• How do you keep up with current trends?

- Do you follow the news, read professionals journals, etc.?

- Do you attend continuing education classes, and if so, on what topics? This is important, because to be a relevant source to clients a planner must be constantly seeking out current, accurate information.

- Do you meet with other professionals outside of your profession to discuss current events and trends?

4. What is your process?

• Some advisors focus on investments (Stock Broker), some insurance issues (Insurance company representative). Many will focus on fully maximizing your FINANCIAL goals because the bigger financial goal, the bigger the fee or the commission. It’s important for everyone to understand each other’s agenda. You also want to know that you have an option that will balance an optimum financial plan with the desire to enjoy the journey of living.

• Find out who they work for. Are they part of a wire house or brokerage? Do they work primarily for an insurance company? Or are they an investment advisor representative with an independent registered investment advisor?

• Is the focus on you and your need to create the life you want or are they primarily focused on financial aspects of your information?

• How do you keep the plan up to date once it is completed? A leading advisor will have tools that will provide you much of your complete financial information to you in real time. This is important for you because, although you may not need or want to be apprised of the intimate details or meaning of the numbers, it is valuable to see your financial status the way your advisor sees it.

Although these may seem like a lot of tough questions, it’s important to understand and ask them because it’s important to you and your future. It’s not just about money. It’s about what money does. Money is the vehicle that powers your plans and funds the life you have designed and are in the process of creating. When you choose an advisor, you want to find the best one for you the first time because you will be involved with them, or should be, throughout your entire life.

In most if not all commercial property listings, you always see their cap rates listed. Investors often use cap rate as one of the main selection criteria for a property as it indicates the investment return. However, the cap rate alone does not tell you the whole story about investment return.

Let’s look at 2 properties: property #1 has 8% cap and property #2 with 7.25% cap:
The first property is purchased for $3M. The lender provides a $2.1M loan (70% LTV) at 7.25% interest. The second property is also purchased for $3M. The lender provides a $2.1 loan (70% LTV) at 6.25% interest

…………………………………Property #1 ($3M, 8% cap)……Property #2 ($3M, 7.25% cap)
Net Operating Income …….$240,000…………………………..$217,500
Loan amount…………………$2,100,000…………………………$2,100,000
Down payment………………$900,000……………………………$900,000
Loan interest…………………7.25%……………………………….6.25%
Annual Interest payment…$152,250……………………………$131,250
Income before tax…………$87,750……………………………..$86,250
Investment equity return…9.75%………………………………..9.58%
Appreciation rate……………1% per year……………………….3% per year
Appreciation value………….$30,000……………………………..$90,000
Total return…………………..13.08%……………………………..19.58%

While property #1 offers higher cap rate than property #2, the return of equity for property #2 is almost the same as property #1. This is due lower interest rate of 6.25%. Why does property #2 get lower interest rate? There are many factors that determine the interest rate:

Loan amount: In residential mortgage if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 9%. But if you borrow $3M, your rate could be only 5.9%! In a sense, it’s like getting lower price when you buy an item in large volume at Costco. Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, everyone needs a roof over their head no matter what so the rate is lower for apartment. Age of the property: loan for newer property will have lower rate than dilapidated one. To the lender the risk factor for older properties is higher so the rate is higher. Area: if the property is located in a growing area like Atlanta metro the rate would be lower than a similar property located in the rural declining area of Arkansas. This is another reason you should study demographic data of the area before you invest in the property. Tenant: single-tenant property with a brand name/national tenant, e.g. Walgreens will get a lower interest than local tenant. Location: the retail center next to Walmart will probably get a lower rate than a retail center shadow anchored by a local furniture store. Your credit history: similarly to residential loan, if you have good credit history, your rate is lower. The lenders you apply the loan with. Each lender has its own rates. There could be significant difference, e.g. over 1%, in the interest rate for the same property. If you apply for a commercial loan yourself, chances are you will pay a higher rate because you apply for the loan at the “wrong” lender. Commercial loans are very different from residential loans. So you should work with someone specialized on commercial loans to shop for the lowest rates. Prepayment flexibility: If you want to have the flexibility to prepay the loan then you will have to pay higher rate. If you agree to keep the loan for the term of the loan, e.g. conduit loan, then the rate could be 1% lower. Soil Contamination Risks: Loan for a shopping center with a gas station will probably has higher interest rate as the gas station has a high risk of oil leak which could contaminate the soil.

Commercial properties also appreciate at different rates. When appreciation is factored into the return, even at a conservative 3% rate, property #2 has almost 50% higher return than property #1, 19.58% vs. 13.08%. The following are some of the factors that may influence the appreciation of a property:
Demographics: in a growing area where more people are moving in than moving out then the appreciation is likely to be high. The more affluent area is likely to have higher appreciation than a low-income area. Age: 40 year-old property is likely to appreciate slower than 3 year old center. Rent: if the current rent is $1.25/SF while the market rent is $2/SF, the property has upside potential when the lease is renewed. If the property has strong annual rent increase, e.g. 3-4%, the net income will be higher next year. Higher income will result to higher property value. Location: a property at a good location, e.g. just off freeway exit, is likely to get a better appreciation. Demand and supply: in a market where there are more buyers than sellers the appreciation should be higher. Inflation: construction materials cost more every year due to inflation and strong demand in developing countries. For example cement, lumber, steel and copper cost more now due to strong demand from China. Labor costs also increase due to inflation. Fees for various construction permits also increase for various economic and political reasons. As a result, construction expenses go up.

So it’s important to work with a experienced broker who does business in various states and can provide you a big picture of the market.

Conclusion: You should evaluate the return of investment based on:
Cap rate the property offers, Interest rate that you will pay, and Potential appreciation the property generates.

It’s not a bad idea to have a broker with knowledge & experience about both commercial real estate and loan to represent you. Otherwise, you may end up screen out the very best properties.

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