The past will continue to be your future if you drag it along with you.
I have learned that we are just too tough on ourselves. We beat ourselves up for not doing everything sooner or better. GIVE YOURSELF A BREAK. You need to get your “tuchas” in gear and start planning for your future.
Investing in real estate is one of the easiest ways I know to do that. At the risk of sounding cliché, now is a perfect time to start. Factually speaking, the bubble has burst and many properties are available. Sellers could not be more motivated. I am watching building lots that sold a year ago for over $30-$80,000, now selling for a third of that. Likewise, single family investment properties that sold for $200,000 and more in 2005 & 2006 are now finally re-selling for $125,000-$150,000. New construction inventories are being sacrificed for tens of thousands of dollars less than what they cost to build when the market was “hot”.
For those of you who are starting late, these facts are great news. Almost anyway you look at it; real estate is the “perfect” business for late starters looking to turbo-charge their earning power. Here’s what makes it so great:
First, with just one property properly purchased and managed, you can instantly create $300-$1000 a month in extra income. The trick is to buy a property you can rent out for enough to generate a positive cash flow. It’s not easy… but people do it everyday! (Notice how I stress the words “buy properly!)
Second, you can make this extra income without the hassle or expense of inventory or hiring employees.
Third, once you have found and rented the property, you really don’t have to do much, if any, work.
Fourth, you have a business with a built in growth potential. As the property increases in value, the value of your new business goes up along with it.
Fifth, you have a business you can sell without having to pay capital gains taxes. (You can avoid and postpone them by doing what is called a 1031 exchange – something we’ll discuss in future newsletters.)
For all these reasons and more, investing in real estate is a wonderful business to consider. One of the main things that get novices excited about investing in real estate is the idea that you can buy properties with no money down. But can you really? The infomercials say you can! The newspaper ads that invite you to a free seminar say it’s easy. But do you really know anyone who has actually done it?
I bet you do know someone however, who told you the best investment they ever made was their home. That is “real life”. You see, almost no one understands – or trusts – all the hype about buying real estate with no money down. But buying a home and owning it for a while can turn out to be a great investment.
The approach to real estate investing that I teach is not a get-rich-quick scheme. Rather, it’s a get-rich-slowly program. There are ways to put it on a fast track, but it is not an overnight process. And contrary to what the gurus and infomercials tell you, you DO need experience to be a successful real estate investor.
I certainly have no intention of doing what a lot of those real estate books and infomercials do – which is to overwhelm you or excite you with all sorts of ideas or facts, and then leave you to figure out the details on your own. Or worse, charge you thousands of dollars for “boot camps” and “free seminars” to explain the details. Instead, I want to share with you a specific plan for how you can become a real estate investor – on weekends!
As it happens, you really can buy real estate with little or no money down, and you don’t have to be rich to do it. Of course, no-down-payment mortgages are generally easiest to get when you are buying your own home, but there are plenty of ways to get no or low down payment financing for investment properties.
So if you are not already a home owner, you must become one before you do anything else with real estate. If this sounds unrealistic or impractical to you, start reading and studying on how easy it really is to buy a house for yourself (even if you don’t make a lot of money) and how important it is that you stop renting.
Once you purchased your own home, I want you to just live in it for a while. Keep it in great condition; make timely repairs and tasteful improvements. Then I want you to rent it out and buy a second home. You live in that second home for a while, keeping it in good repair, and then rent it out, and repeat this process with a third home, a fourth home, a fifth home – and so on.
Don’t think that this is impossible, because it is not. In fact, it is very do-able. The idea of owning four or five homes may strike you today as being way beyond your means or abilities, but keep in mind that we are not talking about doing this all at once – or even quickly. We are talking about a plan that you will execute over the next 5 or 10 years. Remember, people have to live somewhere – so go buy a home now!
You will start out doing very simple deals. As you progress from one purchase to the next, you will learn more and more about real estate, so eventually you will be able to advance to the bigger deals and more sophisticated strategies that the “rich people” use. But in the beginning, we will keep it simple. The fact is, when it comes to money, simple usually works!
Real estate is a unique investment – more so than any other type. What makes it unique are the four fundamental characteristics that you will find listed in every book, infomercial, course or videotape on the subject:
-
Leverage
-
Income
-
Tax advantages
-
Appreciation
Let’s take a close look at each and see how they can make your financial future possible and much brighter:
LEVERAGE
Leverage is what you get when use what is called “OPM”, which stands for “other people’s money.” Buying property with OPM gives you a huge financial advantage, and it is what smart investors use to get rich. It’s what you will use to buy real estate – the “other person” in this case being your bank, mortgage lender or seller.
Here is a hypothetical example of how it works: you find a home for say, $100,000.00. You shouldn’t have too much trouble finding a bank or other lender willing to lend you up to 80% of the purchase price – meaning you will need to come up with 20%, or $20,000.00 for a cash down payment.
Now let’s say that home increases in value by 10%, so now it is worth $110,000.00, or $10,000.00 more than you paid for it. What kind of return do you think you would realize if you were to sell the home for $10,000.00 more than you paid for it?
If your answer is 10% you would be wrong. Remember, you only put down $20,000.00 in cash. The bank put up the rest of the money. But the bank has no claim on the profits you may realize from the re-sale. You get to keep all the profits (after you pay back the loan amount). And a $10,000.00 profit on $20,000.00 investment amounts to a 50% return! Not too shabby. That’s the power of leverage. This is one of the many ways that real estate is a better investment vehicle than say, stocks or bonds or mutual funds. No one will lend you 80, 90 or 100% of the cost of the stocks or bonds or mutual funds you want to buy. Real estate is one asset that lending institutions will lend you tons of money to buy.
INCOME
There’s an old saying that the three secrets to successful real estate investing are location, location, location. In fact, that is not all together true. The real key to successful real estate investing is income, income, income. Think about it. What makes the location important is its connection to income. A good location is good because its desirability or convenience enables the owner to charge higher rents – that is, to produce more income. The more income a property can generate, the better your possibility of positive cash flow. If you can project a good positive cash flow for the property before you buy it, the easier it will be to get the purchase financed.
The beauty here is that someone else (your tenant) is paying down your mortgage, while you get all the benefits of any increase in the total value of the home as well as numerous tax advantages. Your tenant is literally footing the bill for you to get rich.
APPRECIATION
While it has its ups and downs, over the long haul real estate has proven to be one of the most consistent and reliable growth investments around. On average, real estate values have appreciated at an average rate of 6.53% a year since 1968, when the National Association of Realtors started keeping records.
Some people compare this to the stock market returns (which have averaged nearly twice that over the last 50 years) and turn up their noses. What they ignoring is that a 6.5% annual return on an investment that is often 80% financed, is actually worth five times more than that same return from an un-leveraged investment, such as stocks or bonds or mutual funds. Remember our 50% Return on Investment (ROI) that we described above? You just simply cannot get that consistent kind of return out of stocks or bonds or mutual funds.
People often make getting rich in real estate more difficult than it has to be. In fact, there is no reason why you can’t do everything you need to do on the weekends. The only exception may be visiting the bank or the mortgage broker, but with more banks and brokers being open on Saturdays, that is no longer proving to be a real problem. My Weekend Warrior approach to real estate investing is tailor-made for late starters or those who realistically cannot afford to take time off from their jobs to develop and maintain a second stream of income. Just follow these steps and before you know it you will be building your own personal real estate empire.
I want you to look closely at the following chart and consider what would happen if, over the next ten years you purchased five homes that only broke even on a cash-flow basis. The numbers speak for themselves.
VALUE OF |
5% |
PROPERTY VALUE |
PROFIT |
% INCREASE |
|
|
PROPERTY |
INVESTMENT |
IN 10 YEARS |
|
|
|
|
|
|
|
|
|
|
|
$100,000.00 |
$5,000.00 |
$179,100.00 |
$74,100.00 |
1482.00% |
|
|
$150,000.00 |
$7,500.00 |
$268,700.00 |
$111,200.00 |
1483.00% |
|
|
$200,000.00 |
$10,000.00 |
$358,200.00 |
$148,200.00 |
1482.00% |
|
|
$250,000.00 |
$12,500.00 |
$447,800.00 |
$185,300.00 |
1482.00% |
|
|
$300,000.00 |
$15,000.00 |
$537,300.00 |
$222,300.00 |
1482.00% |
|
|
$350,000.00 |
$17,500.00 |
$628,800.00 |
$259,300.00 |
1482.00% |
|
|
$400,000.00 |
$20,000.00 |
$716,400.00 |
$296,400.00 |
1482.00% |
|
|
$450,000.00 |
$22,500.00 |
$805,900.00 |
$333,400.00 |
1482.00% |
|
|
$500,000.00 |
$25,000.00 |
$895,500.00 |
$370,500.00 |
1482.00% |
|
|
|
|
|
|
|
|
|
VALUE OF |
5% |
PROPERTY VALUE |
PROFIT |
% INCREASE |
|
|
PROPERTY |
INVESTMENT |
IN 10 YEARS |
|
|
|
|
|
|
|
|
|
|
|
$100,000.00 |
$10,000.00 |
$179,100.00 |
$69,100.00 |
691.00% |
|
|
$150,000.00 |
$15,000.00 |
$268,700.00 |
$103,700.00 |
691.00% |
|
|
$200,000.00 |
$20,000.00 |
$358,200.00 |
$138,200.00 |
691.00% |
|
|
$250,000.00 |
$25,000.00 |
$447,800.00 |
$172,800.00 |
691.00% |
|
|
$300,000.00 |
$30,000.00 |
$537,300.00 |
$207,300.00 |
691.00% |
|
|
$350,000.00 |
$35,000.00 |
$628,800.00 |
$243,800.00 |
691.00% |
|
|
$400,000.00 |
$40,000.00 |
$716,400.00 |
$276,400.00 |
691.00% |
|
|
$450,000.00 |
$45,000.00 |
$805,900.00 |
$310,900.00 |
691.00% |
|
|
$500,000.00 |
$50,000.00 |
$895,500.00 |
$345,500.00 |
691.00% |
|
|
|
|
|
|
|
|
|
VALUE OF |
5% |
PROPERTY VALUE |
PROFIT |
% INCREASE |
|
|
PROPERTY |
INVESTMENT |
IN 10 YEARS |
|
|
|
|
|
|
|
|
|
|
|
$100,000.00 |
$20,000.00 |
$179,100.00 |
$59,100.00 |
296.00% |
|
|
$150,000.00 |
$30,000.00 |
$268,700.00 |
$88,700.00 |
296.00% |
|
|
$200,000.00 |
$40,000.00 |
$358,200.00 |
$118,200.00 |
296.00% |
|
|
$250,000.00 |
$50,000.00 |
$447,800.00 |
$147,800.00 |
296.00% |
|
|
$300,000.00 |
$60,000.00 |
$537,300.00 |
$177,300.00 |
296.00% |
|
|
$350,000.00 |
$70,000.00 |
$628,800.00 |
$208,800.00 |
295.00% |
|
|
$400,000.00 |
$80,000.00 |
$716,400.00 |
$236,400.00 |
296.00% |
|
|
$450,000.00 |
$90,000.00 |
$805,900.00 |
$265,900.00 |
295.00% |
|
|
$500,000.00 |
$100,000.00 |
$895,500.00 |
$295,500.00 |
296.00% |
|
|
STEP ONE
DECIDE WHERE YOU ARE GOING TO INVEST
In my February newsletter, I addressed the concept of establishing a geographical territory where you want to work and buy investment real estate. Take out a map and decide how far from home you are willing to go and look for properties. Realistically you should not have to go more than 15-25 miles of where you live.
Just two days ago, I was out driving my local geographical territory. I came across a FSBO that was very interesting. As I made two more turns, I came upon 2 more FSBO’s with the same phone number.
When I got back to my office to begin the research on the properties, I noticed that all three properties in that area were owned by the same man. I also noticed that he owned 12 other properties, all within 2 miles of where he lived. The deeds to his 15 properties dated back to 1995. This owner began building his empire 12 years ago.
The sum total of three properties he was looking to sell out of his portfolio had a total asking price of $373,000.00. The sum total of his original costs to acquire the properties was $54,000.00. He purchased these three properties in 1995, 96 & 97 He financed each property with a maximum 5% down payment which meant he laid out a total of $2,700.00 cash. He had used them as rental properties and used the positive cash flow to pay off his mortgages early. He now stands to make $319,000.00 in profit. Remember now, he only invested $2,700.00 of his own money. You do the math! Ah, the beauty of leverage and tenants!!! And all within 2 miles of home!!!
STEP 2
GET YOUR CREDIT ACT TOGETHER
It’s not hard to get a real estate loan. It’s not easy…but it’s not hard. The reason is simple: Banks are in the business to lend out money. And they especially like lending money on real estate. Many banks make real estate loans with the sole intention of “packaging” the loan and immediately selling it to another lender. Banks WANT to lend money. You WANT to borrow their money. All you need to do is qualify.
Along with your current income and employment status, the factor that matters most to lenders is your credit score. It is based on how much you currently owe, how much available credit you have, and what kind of payment record you have compiled over the years. As far as lenders are concerned, these factors provide an excellent indication of how risky it might be to lend you money right now. The higher your credit score, the less risky the banks consider you to be. The lower your score, the more risky they figure you are. Based on your score, the bank will decide the following:
-
Whether or not to lend you money
-
How much they will lend you
-
What interest rate they will charge you & what up front fees they will charge you.
Given all this, it makes a great deal of sense to find out what your credit score is before you sit down with a lender. The easiest way to do this is to go online to www.myfico.com. You actually have three credit scores, one from each of the three credit-reporting bureaus: Equifax, Experian and TransUnion. The scale ranges from a low of 300 to high of 850. Anything over 720 is considered very good.
Considering how much these scores will impact your ability to get the mortgage amounts you want at the rates that will make the property work, it is worth spending time and money to check yours out. And if you wonder how much a bad credit score can cost you, take a look at the following table:
HIGH SCORES, LOW RATES.
(FOR 30 YEAR FIXED $150,000 MORTGAGE; RATES AS OF JANUARY 2007)
FICO SCORE RATE MONTHLY PAYMENT
720-850 6.07% $ 906.00
700-719 6.20% $ 919.00
675-699 6.74% $ 971.00
620-674 7.89% $1089.00
560-619 8.53% $1157.00
500-559 9.29 $1238.00
You can also now find out your credit scores directly from all three credit bureaus, which have credit-scoring systems similar to FICO:
Equifax Experian TransUnion
www.equifax.com www.experian.com www.transunion.com
There is a charge for these services. Visit the websites to determine which report(s) are best for you.
Also, once a year you can get a free credit report from all three bureaus by going to www.annualcreditreport.com. You will not get your credit score, but you will have your 3 credit reports in hand, and you can review them for accuracy and make challenges to inaccurate or out-dated information.
STEP THREE
GET PRE-APPROVED FOR A REAL ESTATE LOAN
There are actually two lessons to be drawn from the credit score table. The obvious one is that having good credit can save you a lot of money. The other is that even if you a bad score, you can still get a mortgage.
So however bad your situation might be, do not give up. This week, visit all the banks in your neighborhood and tell them you want to be pre-approved for a mortgage. That way, you will know in advance how much you will be able to borrow and at what rate – which is to say, how much you will be able to spend on a property and if you can make the property yield a neutral or positive cash flow.
Make sure you specify that you want to be pre-approved - NOT - pre-qualified. Being pre-qualified does not mean you’ll get a mortgage; pre-approved does. Bring along your proof of income as well as your tax returns from the last three years.
Remember, if you are already a homeowner carrying a mortgage and are looking to buy a second home with the intention of renting it out, you will want to ask about refinancing so you can cash out some of the equity in your current home to use as a down payment. And be prepared to prove that you can expect the new property to generate a positive cash flow.
If you can’t find a bank willing to work with you, then get yourself a mortgage broker. But before you take out a mortgage, always make sure to ask exactly what it is going to cost you – not just in terms of the interest you are going to pay but also in terms of the upfront costs and junk fees. See my June newsletter for a list of upfront costs and junk fees. Demand that your lender lock in these fees when they lock in your amount and rate.
STEP FOUR
FIND A REAL ESTATE BROKER
If you are going to be investing in real estate, it’s a good idea to start by working with an agent who can navigate for you until you are experienced enough to steer your own boat. With all due respects to agents and brokers, they really are not necessary once you know what you are doing. All they really end up representing is an additional 6% built in to the negotiated price of the property. But in the beginning, they can be life savers.
There are basically two types of brokers: one who represents the seller (listing agent) and one that represents the buyer (you). Typically, they will split any commission on the property. When you are looking for a broker, you want to find one who produces. I have always believed that success leaves clues. As a result you should be able to find out who the top brokers are in any community within an hour. Go to Google and search for your local real estate offices. Compare the websites. It won’t take long to determine who the big players are. I am very fortunate having found an agent that is competent, aggressive and who has become a close personal friend. I trust him implicitly to lead me in the right direction and to give me the best advice I can get. I rarely use him for purchases, but I always use him to market my resales.
STEP FIVE
START GOING TO “OPEN HOUSES”
The fastest way to become knowledgeable about your area market is to begin frequenting open houses. It’s fun and it’s free. It won’t take you long to put your finger on the pulse of the market. You will learn what exactly is being offered in your geographical territory, what sellers are asking and what buyers are actually paying.
Go out this weekend and start looking at houses. Study the real estate ads, make a list and plan to visit 20 open houses this weekend in your geographical territory. Take notes and create a data base wherein you can compare each property by square foot, cost per square foot, amenity, age and condition.
STEP SIX
BUY A HOUSE AND START MAKING MONEY
There are two ways you can do this:
One is to move in, watch your home appreciate in value for at least 2 years, then sell it and collect the profit tax-free using the homeowner tax break. Then repeat the process.
Many people don’t seem to understand the homeowner tax break. If you sell your home that you have lived in for 2 of the last 5 years, you can take up to $250,000.00 in tax-free profit if you are single – up to $500,000.00 if you are married. This is not just a one time deal… you can literally do it every two years.
If you really love the home you buy, you may not want to move. That’s OK too. Don’t sell the house. Instead, use the equity that you have developed in the first 2 years, borrow against it in the form of an equity loan to use as a down payment on another property that you can rent out for a positive cash flow and voila! You have now developed a secondary, passive cash flow. As long as you have steady income and decent credit, this is a sure fired approach.
You will of course want to study how to be a profitable and capable landlord. QuadReal has an extremely informative CD called THE TENANT-LANDLORD RELATIONSHIP. It explains in great detail, all the benefits and pitfalls of being a landlord. It is a must for the serious investor planning to hold properties to rent.
You’ve got to be comfortable with the responsibilities of being a landlord. Dealing with tenants does not have to be a nightmare. The trick is being selective about who you rent to, while being sensitive to discrimination laws. You definitely want to get an overall and accurate picture of a prospective tenant both personally and financially. Get references and follow up.
Here is a word to the wise: Don’t focus on or be intimidated by the cost of the property, focus instead on the income it can generate. If it pays for itself, who cares what the costs are?
So there you have it: The WEEKEND WARRIOR approach to real estate investing. The key principles are:
Go get started. Go to your first open house this weekend. Good luck.
