REITS Vs Real Estate

‘Investing does not have to be complicated but it seems many of us want to make it so.’

I read an article recently where the author tried to make the point that investing in REITs (Real Estate Investment Trusts)  was better than investing in Real Estate. I didn’t buy all of his arguments and believe his conclusions were flawed. Just so we are clear I own many REITs and I have owned and still own rental properties.

Which is better ? Investing in REITs or Real Estate.  The answer – There is no simple answer. I love REITs. They have many advantages over Real Estate properties and they have many advantages over general equity stocks. While I will not discuss all the advantages and disadvantages of REITs here (Look for a future article – Why I love REITs) I will point out the number one advantage of owning a REIT – Its higher yield. Remember your two best friends? That’s right Mr. Time and Mr. Yield. Together you will probably find no better friends, at least in the investing world.

But let’s compare his arguments for REITs with that of Real Estate:

REITs are less risky, better diversified, liquid and cost-efficient

Less risky ? That is very subjective, Real Estate is not any more of a risk than REITs, in fact I would argue that Real Estate is in fact less risky of an investment when done by someone who knows what they are doing. Better Diversified? Again, this one just not make sense, but I believe I see what he is trying to say but comparing a basket of stocks with a real estate investment is comparing apples to oranges. He also states that unless you have a Hundred million dollars you cannot possibly be well diversified – I believe he pulled the figure out of a hat somewhere! Besides I know people that own dozens of properties in many locations and in some cases differing types of properties so again I do not agree. Cost efficient ? I don’t understand his argument here so I really don’t know how to respond except – ???? The one part of this statement I do agree with is that of Liquidity. It is generally much easier to buy and sell REITs than Real Estate.

REITs have historically outperformed private real estate

Pure Hogwash ! In fact in his supporting paragraph he compares the performance of REITS  to the S&P 500, and Private Real Estate Funds, not to private real estate investors. Big difference here. I have personally known private investors that have made over 100% returns on real estate deals.

REITs provide REAL passive income

Well, okay. I’ll buy that unless you pay a property manager to manage your properties you will have to put in more work, but real estate investing is certainly no 9-5 job ! But this even tries to make an argument that you will end having to take on a second job. Totally ridiculous statement in my opinion.

REITs are not necessarily more volatile

Again he tries to compare REITs with Private Real Estate without even comparing the two. He uses various metrics to point out that REITs are not more volatile that Private Real Estate but does not show any examples of Private Real Estate volatility. The thing is I do agree that REITs are not that volatile but neither is real estate. Yes, real estate does fluctuate but very few of us look up the expected price of our home or real estate investment very often. The truth is though your home more than likely will not drop in value over night because the FED has stated they may raise interest rates or because of tensions with some foreign country, or just because the whole stock market is in a general decline that day. I have no hard core proof to present, but my own experience tells me that Real Estate for the most part holds its value very well.
Then of course we have his conclusion:

My conclusion is that if you are not a professional real estate investor, forget any form of private real estate investing including crowdfunding, limited partnerships and direct ownership (excludes home, and other exceptions). And even if you are a professional investor, you might still be better off investing in REITs.

Obviously there exist many exceptions to this conclusion, and I am sure that private real estate makes more sense for one investor than another. But REITs have so many advantages over private real estate that it is difficult to argue against it. REITs are less risky, better diversified and liquid, but they have still managed to outperform private benchmarks in the past.

Read his “conclusion” carefully. It just does not make sense. Only professional real estate investors should invest in private real estate? Really? Does one have to be born into the Professional Real Estate Investing profession?

And then – Even if you are a professional real estate investor you might be better off investing in REITs?  Then he repeats his unsubstantiated arguments again to summarize his conclusion.

My Take.

I personally invest in both REITs and in Investment Properties. Yes, real estate takes more time and effort and yes, real estate can be difficult to sell sometimes, with these I agree. But no, Real Estate is not any more volatile than REITs and it is not only for “Real Estate Professionals”.

REITs are great investments also. Many of my REIT investments make great returns for me and I enjoy collecting yields ranging from 5% to 10%. Some of my current REITs are APTS, VTR, WPC, O, CCP, OHI and I am happy to own them, but they are very different than owning actual investment properties. I have generally achieved much greater returns investing in real estate than I ever could investing in only  REITs.

My advice.

If you are up to it and in a financial position to do so I recommend not choosing between the two but investing in both. Then you can experience the best of both worlds, more diversity in your investments, higher returns and still maintain some liquidity for your needs.

Investing does not have to be complicated but it seems many of us want to make it so.

Your thoughts and comments are welcome !

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Sell or Rent Your Property ?

“He is now earning $10,332 per year or $861 per month in additional income !”

This was an actual question from my son seeking my advice on what he should do. He is in the Navy and has to move to Oklahoma for his next duty assignment. The Navy in Oklahoma ? He is actually being assigned to a Joint Services assignment where he will work on an Air Force Base. He owns his house at his present assignment and has determined that can rent it for a small profit of $265 per month. If he were to sell it he should realize a gain of about $65,000 when all is said and done.  Should he rent it or should he just sell it? There is a ton of variables to consider but in this particular case this was my advice.

I advised him to sell the property. He knows that I am not adverse to rental property, in fact I have owned many rental properties and have made great returns from them but in this case I just had to say sell. My reasoning was based on several factors.

The first thing to consider is the shear distance between where his property is located and where he will be stationed. It is hard enough to manage rental property but just like relationships long distance rentals are a bad idea. Even with a good property manager there is still a need for your participation in the property. Property managers typically charge 10% of the rent collected which also drains your positive cash flow – for example if you rented your home for $2,500 a month the property manager takes $250 per month in fees. This is expensive ! You also need to factor in property taxes, Insurance, maintenance costs , tenants not paying rent or leaving after the lease and having an empty home that collects no rent at all. Even minor events can become expensive when you have to rely on others to do the work for you.

If he choose to sell the property then he will net about $65,000 after closing costs, Real Estate agent commissions and taxes …….. and of course there are several things he could do with that ………. use it as a down payment on a new home, pay off other debts but I advised him to invest it. Keeping in theme with that of a Dividend Income Investor one of my priories is when you earn money or come into money from what ever source the first thing you should think about is putting that money to work earning income for you.If you spend the money it cannot earn money for you. If you spend it you can never have it back. Sure, there are lots of circumstances where spending money can save you money, say paying off a high interest loan for example but when you invest that money so that it produces an income for you it does that forever! In fact if you do it correctly it will not only produce income for you for the rest of your life (and your children’s lives should you choose) it will actually grow and make sure you get constant raises in your income.

So if he takes the $65,000 and invests it in Dividend Stocks earning 9% per year ( My own portfolios exceed this yield) then it will immediately produce $5,850 in the first year which equals about $487 per month in income! He will be in Oklahoma for a total of six years. So if he lets the investment t continue to compound at the end of 6 years his account will have a value of almost $111,000 as the original $65,000 would have paid him $45,874 in Dividends (Income) over that six years.

He is now earning $10,332 per year or $861 per month in additional income ! All from not spending the $65,000 !  At this point you could withdraw $500 a month for expenses and still have your investment continue to grow and best of all you still have the cash because you did not spend it.

Rule # 1 – Never, Never spend money you do not have to !

Will he take my advice ? I doubt it as young people seem to not be able to see tomorrow for all the clutter today but I really hope he does because it will make his life easier later for doing just a little bit of planning now. Regardless of what he does though if you find yourself in a similar situation please stop and consider what I have laid out here for you.

 

Any thoughts or comments? We would love to hear them!

The Renovation Starts

“During my initial inspections of the property I already knew I had an electrical issue in that two of the units needed breaker panels “

This is the 2nd article in a series in which I am chronicling my Real Estate Adventure. Previous article links for this series can be found at the end of the post. I have purchased a property that had been previously converted into 4 apartment units and need a total renovation. Follow along with me to find out if I have bitten off more than I can chew or will I realize my dreams of renting the apartments for a sizable monthly cash flow.

In the first post I discussed how I discovered the property, purchased, financed and Insured the property. Now the work and the spending begin.

During my initial inspections of the property I already knew I had an electrical issue in that two of the units needed breaker panels to be replaced as the existing ones were too small for modern appliances and amperage loads and they were the old fuse type panels. For those of you that are too young older panels instead of having breakers that flipped on and off like a switch they had fuses that screwed into each circuit. If a fuse blew you had to have a fuse of that size handy to replace it or, as many would do back then, is bypass the fuse by placing a copper penny behind the fuse. It was very dangerous thing to do because there was usually a reason the fuse was caused to blow in the first place and by doing so you just bypassed an important safety feature. I’m not sure that would work with the modern penny now days as they are not pure copper any longer.

Because I realized I could not do anything of importance on the apartments until I had electric service I had made arrangements with an electrical contractor for accomplishing the work. I knew this was the most important place to start.  They actually contacted the real estate agent and made arrangements to check out the work prior to closing. They gave me an estimate for the work but also determined that in addition to what I already knew had to be done to bring it up to code I had to replace the feed wires for all the meters and breaker panels, install outside main cutoffs for each unit and because the new panels would not line up they had to change out the electrical service drops on the roof.  Immediately after closing I went to the property and was surprised to see the electrical contractor there with the power company preparing to start the job. This was on a Monday after noon and by Wednesday evening they had completed the job. On Thursday the County Inspector showed up and inspected the work and then I was cleared to contact the Power Company to have the electric service activated. Unfortunately they were unable to come out until Friday morning so I didn’t have as much time as I would have liked to fully inspect the property. Most of the light fixtures did not have bulbs and with 9-10′ ceilings I could not reach them anyway so I had to buy a ladder and few packs of light bulbs (LED) from the hardware store.

I have decided to make every fixture and light in the apartments utilizing LED bulbs. It will give the apartments a more modern feel , save the tenants and myself money on electric bills and be a positive for the environment. In addition the bulbs should last 15-25 years so with less changing of bulbs I am hoping it will reduce damage to lighting fixtures. I have to say I put the bulbs on the front porch left them on and drove by at night and it made the outside look great at night.

Another quick job I had done was having a large Pine tree cut down in the front yard. The center of the yard is adorned by a magnificent Magnolia tree. It is very old and gives the home sort of a southern plantation feel. For what ever reason though there was a large Pine tree growing directly in front of it so I decided to have it removed. It took a couple of guys I hired about an hour to cut it down. There is a lot more that needs to be done in the yard but that will be saved for another time as I am still in the planning stages.

Pine Tree blocking view of Magnolia
Pine Tree blocking a beautiful Magnolia Tree

I had to head back to Virginia Saturday morning so my work for the week was over, although some what limited I do feel it was productive and I am happy with what I got done. Now that I am back at home I have to come up with a plan. My tentative plan is to start planning for the plumbing and Air Conditions.

My Budget for the first Unit is as follows:

Electric Panels  Done – $5,000

Plumbing – $2,000 ( All supply side Plumbing, my son in law is doing the work)

AC – Already had some one check it out – 1 Unit is fine, 2 units need new electric, and one unit was (missing ?- stolen?) $3,500 quote to replace missing unit 2.5 ton

Demo – $600

Paint – (I’m doing the work ) – $600

Kitchen – $12,000

Bath – $3,000

Flooring – $2,500

Total Cost – $29,200 – Note: The Electric & Plumbing was for all four units so future units should come in cheaper.

 

What do you think ?

Previous : Article one of My Real Estate Adventures

My Real Estate Adventure

“the purchase, renovation and rental of a one hundred year old property that has been converted to a 4 unit apartment building.”

Ever wonder what it would be like

To buy a Rental Property ?

This is the first article in a series that will chronicle my adventures in Real Estate investment property in detail. Including the purchase, the renovation , the mistakes along with the good, and hopefully the rental of the units and the overall outcome of my experience.

Well wonder no more ! I have done just that and you can follow along my journey with no financial risk to you what so ever. This will be a series of articles I plan to write to document my journey through the purchase, renovation and rental of a one hundred year old property that has been converted to a 4 unit apartment building.

First the history behind my purchase. I was visiting my oldest daughter that lives in south Georgia. The visit was one of several trips I had made last year as I was planning on moving there from Virginia. My wife had died from cancer a couple of years back and it was just myself and my two youngest children so I thought it would be nice to buy a home in Georgia that we could move to in order to try and bring back our family together. One thing I have realized is the importance of family.

We had looked at countless homes in the South Georgia area and even in the northern Florida area and to a lesser extent in a eastern area of Alabama. Unfortunately nothing seemed to meet our needs, at least not at convenient times. I had found several properties on Zillow that were very promising and met the needs of what we were looking for in a home, but it seemed like every home we liked at the time someone beat us to it. I decided that it was time to try a new approach. I saw a 2 acre lot in a great neighborhood. It had a lake, a couple of ponds and only had a total of 36 lots in the community with No Homeowners Association !( I am strongly against HOAs and have vowed to never buy a home that is in one again) So, I bought the lot. My intentions were to build a home on the lot for my youngest children and I to live. I found the home plans we liked, met with a builder and started exploring loans for the construction.  In January 2017 my children had a long weekend off from school so I went to talk to the builder about the project. It was during this trip that I stumbled across this old property that was listed for sale for $120,000. I scheduled an appointment with a real estate agent to look at it and learned that it was actually a 4 unit apartment located in the most desirable part of town.  I also learned that it had been mostly vacant since 2007, having been purchased in 2009 by an investor who I later learned, lost the house when he went to prison (sorry, no details on why he went to prison). I looked at every square inch of the structure and noticed that there was indeed quite a bit of work that was needed to be done to make these apartments livable but what I was really looking for was to make sure that the “bones” of the home were in good shape. I could see a lot of potential for this Bank owned property. At this point I was  torn – Build the home of my dreams or buy an investment property. I had a lot of serious thinking to do.

That night my family and I discussed the property and while all agreed that it was potentially a good investment not everyone agreed that I should purchase it.

The next day I returned home to Virginia( of course my mind was on this the whole 9 hour drive back)  and over the next few days I pondered the deal and started doing research on how much it would take to renovate the property and bring it up to modern standards. After my research I estimated it would cost about $90,000 to renovate the property to but adjusted that total to $110,000 just for a built in contingency. So with a purchase price of $120,000 and added costs of $110,000 my grand total would be $230,000. Not bad for a $5,000 square foot apartment building. That would be a cost of about $58,000 per unit. Now I had to determine if I could make money on the apartments when finished. My research showed the going rate in this rural area of Georgia was about $600 for a two bedroom apartment. This building had 1 three bedroom / 2 bath apartment (1,500 square feet) and 3 Two Bedroom 1 bath apartments (1100 square feet each). Since this was considered the upscale part of town and I believed I could get about $3,000 per month for the units. On a side note the single family home directly  across the street  sold for $370,000 and it was only three thousand square feet. So after reviewing these numbers my mind was made up, This was a deal I could not pass by. I decided to make the bank an offer.

I knew just how long the bank had been sitting on this property, having to pay taxes of over $3,000 a year and keeping the lawn cut, not to mention carrying this on  their books so I made a low ball offer in February 2017 of $55,000 for the property. The bank rejected my offer and to make  a long story short we finally came to a sales price of $85,000 for the property. That was $35,000 below their asking price! I was elated. My two youngest children, not so much. If everything goes as planned (I know it seldom does) this will bring my total investment price to $195,000. Not bad for an expected return of $3,000 per month. This would mean the apartments could pay for itself in as little as six years.

So now I had made an offer, it was accepted, so I wanted to obtain financing for the project. I had just sold my main home so I had the money to pay cash but remember what this site is all about – making money and one of my main philosophies is to Never give up your cash if you don’t have to. In this case I needed about $195,000 ( $85,000 for the apartments and $110,000 for the renovation). By leaving this money invested I was confident I could earn a minimum of 8% on the money (Approximately $16,000) while loans were going for around 4% or less. Unfortunately I found out that regular banks with regular mortgages would not lend money for homes that were not “move in ready” so I had to go to a local bank which gave me a five year loan with a balloon payment so I decided to only go with financing the $85,000 and I would finance the renovation costs out of pocket.My new plan was to take care of major items like Electrical and Plumbing up front and the finish each apartment one at a time. In this manner I can spend a minimum amount of money on each renovation and as I get the first apartment finished I can rent it out to help offset the cost of renovation on each following apartment. At least that is my plan, we will see if I can make it work in reality.

Now I had to find Insurance for the apartments. The bank required it but of course I would be very ignorant to not get insurance on the property. As a side note : I also purchased a Title Insurance Policy at closing. I have learned that for very little cost , in this case $275, you can protect yourself. One example I remember specifically was an instance when I lived in a town-home. A builder built units behind ours on another piece of property and started selling the units. It turned out the builder somehow built the town-homes on someone Else’s  property and there was a big fight for the ownership. I don’t know whatever happened as I moved away but I did  learn that you need to protect yourself from these rare types of circumstances. You just never know of the unknown lurking in the shadows of a property. Getting back to the insurance; the first quote I got for rental insurance was for $5,000 per year ! They were telling me that the building I was paying $85,000 for would cost them $888,000 to replace! This would make it one of the most expensive properties in town.  Just a little more than I expected. Actually the quote was more than double what I was expecting. I sought other quotes but the other companies refused to give me a quote on a rental property because it was currently unoccupied. I ended up having to get a “Builder’s Insurance” policy because the building was vacant and would be under renovation. Even on that, one company quoted me $2,000 and another $850 for six months. No one would give me a quote for a permanent rental policy until the home was finished except the original company. So of course I took the $850 policy. It covered the property for $200,000 which was sufficient to cover the money I would have invested into it.

I originally had hoped for all the units to be renovated within six months but because of my new renovation plan of paying out of pocket and renovating one apartment at a time instead of all four simultaneously , I now expect it to take about 8 months to complete. Once the renovation is completed and I have people living in the apartments I can return to the bank and apply for a more conventional loan with more favorable terms. I plan to start advertising the apartments slightly before they are finished in order to rent them as quickly as possible. I am currently leaning towards a 15 year mortgage but I will be in a better position to make that determination at the time I have all the facts. After the original fiasco with obtaining a mortgage and an Insurance policy I will not just assume it will be an easy process this time.

I also intend to source as much as I can from the local community that is contractors and vendors. I want to let the community know I support them and appreciate their support of me. This is a rural small town and I want to make sure we are are all working together to make our community a better place. I believe that in turn the community will support me also.

One thing is certain, this is going to be a challenging project, especially when you consider I currently live out of state. At the same time it excites me with the possibilities of taking a property that so many others had failed on to turning it into a updated and modern income producing property. That is rewarding to me into itself but the income will be icing on the cake. Who knows, if this goes well I just might take on additional projects. And of course I still plan to have a home built in a couple of years.

I hope you have enjoyed reading about my Real Estate Adventure and will join me as I post updates along the way. It should be interesting to watch unfold. I have owned Rental Properties in the past but they were always single family and required little or no renovations. So here I am in the beginning stages of a huge renovation project with my two youngest children believing I have gone insane while my two oldest children seem to be excited about the project.

Will the project come in on or under budget? Will I meet my timeline? Will I be able to get at least $3,000 per month in rental income? What unknown challenges will I face? Will I want to continue and make this a full time business in the future? We will answer all these questions and more so follow along as I document my largest renovation and rental project ever!

Comments or thoughts? Please share them with us.

PS: I would also like to say I welcome design ideas also. One discussion I am already having is Kitchen counter tops – Should I go with Granite or should I go with a lower cost item like a Laminate counter top , will the granite bring in more rent ? The more suggestions the better and the more discussion  the merrier!

Coming Soon – Follow My Adventure

“Coming Soon is a series of articles on my Purchase of a 90 year old home that has been converted to four Apartment Units and has set empty for most of the past decade. “

Hello Readers!

I have multiple personalities – at least when it comes to investing. While my main style of investing in the stock market is Dividend Income Investing, I also look for multiple sources of Income. This is for a few reasons as I hope to explain further in an upcoming article on the subject but I will briefly touch on right now. First you need sources of income to build your Dividend Income Portfolio because if you don’t have them you may never save enough to reach your income goals. The other reason is for safety reasons. With multiple sources of income coming in it acts like an insurance policy so if you lose one source for any reason you still have income coming in. And of course the ultimate goal should be to have Excess Multiple Income pouring in so you can reach your goals even sooner. I personally have multiple sources of income, this blog is one of my newest sources. I also never stop looking for opportunities and I have decided it is time to invest in real estate. So as they say I do practice what I preach and now a new journey has started.

Coming Soon is a series of articles on my Purchase of a 90 year old home that has been converted to four Apartment Units and has set empty for most of the past decade.

It is a daunting task to say the least but I am going to take on the challenge. If you have ever thought about doing the same you might be interested in following along as I plunge deeper into a real estate deal than I ever have before.

I am certain I will have many trials along the way and question my own sanity but hopefully if I stay focused  the reward will be high. The first in a long series of articles will be published soon which will cover my experience from purchase to hopefully fully renting the units out. I hope to publish before and after pictures and will welcome the advice and thoughts of my readers about decisions.

My background is that I have owned three rental units in the past but these were always places I had lived previously and rented out. The renovations of prior structures were minor compared to what I am about to embark upon. Where do I start – I don’t have a clue, but I will figure it out and move on.

When all this is said and done I intend to then decide if I want to find another place to renovate or even start a real estate flipping business.

I chose this particular property because I know this area can be a little slow in re-selling properties so I know that I can rent out units and more than cover the mortgage and expenses.  In fact, just renting two units should have me seeing a profit. The home is located in what is considered a very good area of town and there is currently a shortage of rental units in the area and practically no upper end apartments of which I intend to make these in hopes of attracting more affluent tenants. There are four apartments. One three bedroom with two baths and close to 1600 square feet. The other three units are two bedroom with one bath and are all around 1100 square feet. Each unit will feature stainless steel appliances, Hand scraped flooring and each unit will come furnished with its own washer and dryer.

Its a old style farm house with a wrap around porch on the front, with a porch swing on one end and on the other end I intend to have a couple of old fashion rocking chairs. It presently has an old wooden deck in the rear but I will remove that and replace it with a concrete patio and a built in park grill for barbecues.

Front of House
Front of House at time of Purchase – My Adventure !

Other features I plan on having for the apartments are a forty year Metal roof, electric fireplaces( the existing ones are wood burning but I do not want wood burning fireplaces in rental units for safety reasons), new siding with a fresh new look and adding shutters, new landscaping, an upgraded drive and parking area and a multitude of safety features like Fire Extinguishers, more smoke alarms and emergency exit signs and emergency lighting in the central stairwell. All lighting will be upgraded to new low energy and long lasting LED fixtures, modern ceiling fans and I will look for energy efficient appliances where practical. I am also considering upgrading water heaters to tank-less heaters to save space and energy but have not made a definite decision as of yet. Anther feature I am considering is skylights in the upper units and a light tube for the central stairwell.

I believe this will be a learning experience for me and invite you to follow along on my journey.

If you think this might be interesting be sure to sign up to follow this blog so you will be notified of new articles being posted.

 

Thoughts or comments? I would love to hear from you !

REIT Guru Recommends Sell These REITS

“Brad Thomas is the author of two books”

Brad Thomas, a noted REIT expert has recently placed a sell recommendation on two popular REITS.

Brad Thomas is the author of two books “The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts” and “The Trump Factor: Unlocking the Secrets Behind the Trump Empire”. He also writes articles for Forbes and Seeking Alpha , has his own Newsletter and Radio show about investing in REITS.

He is also  my favorite author and REIT expert. He has share his experience at real estate development with his readers. It is because of this real world experience I believe it gives him a clearer insight into the financial workings of REITS. With connections to several REITs he follows and his real world friendship with President Trump he is not only well schooled but well connected as well.

He has currently recommended a sell on two widely held REITS. The first is Gladstone Commercial (GOOD) and here is a quoted summary of his conclusion:

“In fact, I would argue that from a risk-adjusted perspective, GOOD shares are now expensive and investors should consider trimming or possibly selling. It is clear that GOOD is not in a position to raise the dividend and the potential for share price appreciation is muted.”

The second sell recommendation is Lexington Realty Trust (LXP)  and here is the summary of his sell conclusion for LXP:

“As you can see below, we don’t see the same “margin of safety” with LXP as we saw a year or so ago. While the company has been successful with its recycling platform, the payout ratio has become tighter, and the potential for dividend growth is less exciting. LXP is forecasted to grow modestly, but the extreme office exposure and tight payout ratio suggests it may have lost some of its sizzle”

I currently own LXP and have decided to hold my shares at this time however I certainly would not recommend buying LXP at this time.

Both REITS are popular among investors seeking current dividend income.

For more information on Brad Thomas visit his website IREITINVESTOR.com

 

Thoughts or comments? Please share them below!