The $7million Real-Estate Rule

Posted on June 11, 2008 by Adrian

Yesterday’s post, The $7million Real-Estate Question(s), was aimed at the first-time investor, perhaps stuck on making their first real-estate investment (not home) purchase decision by the – perhaps too many – factors that they would need to consider.

In essence, what I said is: in a commodity market, buy the commodity at commodity prices … and wait!

Wait for what?

Ideally, forever … but, at least until the values have improved.

But, what kind of real-estate are commodities?

Houses and apartments in most areas are commodities; small multi-units (duplex / triplex / quadraplex) can be, too. Anywhere where there are lots of them near each other …

… preferably lots for sale, and fewer vacant [AJC: Too many vacancies can show an area that’s declining in population and/or jobs (with job growth being, by far, the most important of the two) … we don’t want that!].

Also, for residential property (that you don’t intend to live in) you really need to go for an area that will/can appreciate as it can be very difficult – if not impossible – to get them to cashflow-positive on a reasonable deposit (say, 10% – $20%).

Even so, my first two $7million Questions showed you the right type of market to buy in … which is, right now!

But, when evaluating more complex real-estate transactions, such as: commercial apartments (6 and above); offices and factories of all sizes … surely the The $7million Real-Estate Questions are not enough?

And, surely you are right …

These types of properties are sold as ‘businesses’ in that they have:

a. Income (or rent)

b. Expenses (or outgoings)

c. Taxes (unfortunately)

d. Profit/Loss (or Net Operating Income)

I will run you through how to analyse some of these types of property in future posts; for now, I want to tell you one way to assess these types of Investors’ Real-Estate that is NOT as important as you may be lead to believe, and another way that is MUCH MORE IMPORTANT.

Because commercial property runs at a profit (or loss) and has an Income Statement, people tend to buy (and sell) these types of rel-estate on the basis of their financial statements alone …

… and, not on the sale of comparable buildings around!

This is critical to understand – as it is totally opposite for the types of residential real-estate that most of us are used to.

The second thing to realize is that these buildings sell on a variety of bases, but usually the ‘expert’ real-estate acquirer will assess the Net Operating Income during Due Diligence and buy for a multiple of that … there is usually a multiplier [AJC: that the real-estate books that you read will all say is around 10 … but, these days in many of the hotter markets in the US and overseas, it will be as high as 12 to 16 – or even more when things get crazy].

This is called a Capitalization Rate or simply Cap. Rate.

Yippee!

This is just another way of saying that when you buy the building, it will return 10% of the Purchase Price (for a cap. rate of 10) by way of Net Operating Income (which should improve as you increase rents).

A larger Cap. Rate when you talk “times” (or smaller when you express it as a %) is BAD for purchasing (but, great for selling if you can increase the rents a lot!); here’s why:

A 12 times Cap. Rate means that a $1,000,000 property will only return (NOI or Profit) a little over 8%

A 16 times Cap. Rate means that a $1,000,000 property will only return (NOI or Profit) a little over 6%

So, a serious investor will pull out all the numbers, take a look at the Cap. Rate and make a decision whether to buy (obviously, there will be a lot of other factors … this will drive the financial decision).

How will they typically make that decision?

Well, they’ll compare the % return to what the cost of funds are … if they can make enough to cover the mortgage … then they’re in. So, with a Cap. Rate of 8% and Mortgage Interest rates at, say, 7%, it’s slim … but, they’re in front!

Cap. Rates are really useful, when you can a property for, say, $1,000,000 – add $50,000 of renovations that allow you to increase rents by 10% … all of a sudden, your property is now worth $1,100,000 – a 100% Return on your $50k rehab. investment!

But the Cap. Rate alone doesn’t give you the true picture for the original purchase decision … there’s a MUCH better way to look at the financial decision … first, here’s why:

A. Your investment in real-estate is only the deposit – typically 25% (plus Closing Costs) on commercial

B. The Bank’s investment in real-estate is the mortgage – typically 75%

But, you get the ‘return’ or the Net Operating Income on the entire building …

Because of this wonderful benefit of buy-and-hold, income-producing real-estate, the ‘right’way to value an investment is by it’s return on what YOU put in: it’s called your Cash-on-Cash Return.

So if you put in 25% deposit on a $1,000,000 building with a Cap. Rate that’s returning 1% over the mortgage rate, then you are getting:

1. 8% return for the 25% that you put in, plus

2. A ‘free’ 1% for each matching 25% that the Bank puts in – since they put in the other 75% that’s another 3% effective return.

All of a sudden that ‘small’ 8% return that seems only a little above the bank’s interest rate of 7% swells into a real 11% Return on your money [AJC: most investors will look for a return on their money (in real-estate) in the 10% – 20% range; this requirement will increase as Mortgage Interest Rates increase] … and, we haven’t even counted on any appreciation, yet (!):

i) As Rents increase, so does your return because YOU don’t have to put in any more money … inflation does all the work for you!

Example: if interest rates remain the same (and, they will because you DID fix them, right?), but the rents go up a mere 4% per year over costs (and, they will because you DID put a ratchet clause in the lease, right?), in just three years the building’s 8% return will swell to 9% …

… and your cash-on-cash return will jump to 9% + (3 x 2%) = 15% – try getting thatin CD’s, Bonds or Stock Funds!

ii) As the building appreciates, so does your future return, even though you can’t cash on this right now (unless you refinance, of course).

Example: If cap rates don’t change (that, unfortunately, is up to the market), the 4% increase in rents will ALSO increase the value of the property by 4%. Which sounds great, until you realize that you only put up 25% of that …

… so, YOUR return increases by 16% – try doing that with Stocks!

Now, how does a 30% return (half now, half when you sell) sound to you? And, what happens if you hold for a little longer?

You do the math!

The $7million Real-Estate Question

Posted on June 10, 2008 by Adrian

I’ve posted recently on the importance of real-estate to your portfolio …

… only ‘important’ of course, if you intend to retire on more than the Pauper’s Million 😉 Well, at least important enough that you probably need to find a good reason NOT to invest in it (e.g. can’t stand the stuff; market is too crappy; can’t find a deposit; etc.)

So, how do you tell a good real-estate investment from a bad one? There are so many variables:

1. Purchase Price – This varies by type of property and area

2. Deposit Required – This varies by type of property and Lender

3. Mortgage Repayments – This varies by type of property and Lender

4. Comparable Returns – What would other investments produce?

5. Comparable Risks – How risky is this investment v. other uses that you put your money to?

For the new real-estate investor, these factors are almost impossible to accurately assess, so investing in real-estate usually comes down to:

(i) What kind of real-estate appeals to me as an investor? Residential – Houses; Residential – Condos; Residential – Multifamily; Commercial – Apartments; Commercial – Offices; Commercial – Retail; Vacant Land; and the list goes on

(ii) What area/s am I interested in? For most real-estate ‘noobs’, that means their local neighbourhood, town, city, or possibly state.

(iii) What price range can I invest in? For most this is dictated by Type of Property, Deposit Available, Income available to service the loan, and the Lender’s Rules

Which is all well and good, but here is how most real-estate investors ACTUALLY invest:

They see something that they like and can afford, and:

a) They buy if they are not too chicken, or

b) They pass if they are … well, you know … cluck, cluck cluck.

Since, I am usually scratching in the yard myself, please don’t consider this an insult 🙂 I actually think that this is a perfectly reasonable way to buy real-estate IF you first (more bullet-points!) ask the $7million Questions:

A. Is the market off its high?

B. Do you at least understand the type of property that you are looking at – and, the area – and consider it a reasonable buy (i.e. you don’t think you are paying ‘top dollar’ to get in)?

C. Are Interest rates off their highs?

D. Can you can afford the payments?

E. Ideally: Will the property be cash-flow positive (or very close to it)?

F. Can you (will you!) hold on to the property for a very, very long time?

Here is the basic principle:

Certain types of real-estate (certainly the entry-level types that most beginners would look at) are virtual commodities … you can pretty easily assess their value (and, potential rents) by looking up a few databases (Zillow, RealtyTrac, Loopnet, Rent.com) and/or newspapers.

There are more intelligent people than you and I out there who actually know how to assess this type of stuff … just trust a ‘commodity market’ to price reasonably accurately and you can’t buy too wrong.

One of my first acquisitions was a simple little condo … the market had been low but was starting to appreciate (how did I know, my 20 year-old nephews told me … they had just bought two condo’s in the same area!).

I didn’t know very much about the values, but I found a condo that was going to auction (actually, the most common way that condo’s were sold in this particular location) and the real-estate agency was from out of town, so I figured that they would attract fewer buyers than an well-advertised local agent would.

The only other keen buyer appeared to be a young builder: I could tell by his overalls, ass sticking out, and his trusty tape measure in hand.

So, what did I do? I just bid at the auction until it came down to just him and I … and, I kept bidding slightly more than him, until he stopped bidding!

I figured that HE knew how to do his sums and HE would not overpay … so, the max. I could overpay is by the amount over his bid that I would have to bid. Risky: you betch’a! Did it work: you betch’a!

His advantage: any rehab would be ‘at builder’s cost’ (I at least knew this would relatively minor … kitchen / bathroom / carpet / paint / lights / knobs). My advantage: Time … I could afford to hold.

In fact, we still own this condo and it has done very nicely thanks … it’s the only single condo left in our portfolio.

But, you could do even better: if you are prepared to do what most other (lazy) people won’t do – which is turn over a lot of rocks and put in a lot of low-ball offers before one is accepted – then you might actually out-smart the so-called ‘smart investors’.

So, how and when to get started?

For those who are following along, you will realize that the current market satisfies $7m Questions A. and C. … a bit of work will help you decide on $7m Question B. … and, your Lender will pretty quickly sort you out on $7m Question D.

$7m Question E. is the one that will give you the most difficulty … as you may not know how to estimate the costs (loss of rental; utilities; Repairs and Maintenance; etc. etc. … if that’s the case, don’t worry TOO much:

TIME (which is why you hold for a long, long time) will cure most ills … and, my $7m Questions … will protect you from disaster.

Oh, and do JUST ONE ONE MORE THING:

Lock in the current low interest rate for as long as the lender will let you!

That will help TIME help the MARKET do its thing … which is get the property/s to appreciate and the rents to rise 🙂

Now, if you can do the analysis that a ‘seasoned’ real-estate investor can do … well, go do it … you will make more money / faster, if you do.

But don’t let fear and ‘paralysis by analysis’ stop you … just use the $7 Million Dollar Questions, and …

Good luck!

Will you ever put a penny in your 401k again?

Posted on May 23, 2008 by Adrian

I stuck my neck out, and made a candid admission; as expected, I copped a little flak – after all, I admitted to the world that I don’t even know how much is in my own Retirement Accounts 😉 Whoo boy!

What surprised me is that I didn’t lose readers … I even gained some; Josh pointed to the reason why in his comment to that post:

Controversial? This article was absolutely controversial and that’s why I come here. If you want extraordinary results you need to make controversial moves, a.k.a “taking risk”.

Thanks, Josh. Here’s how I see it:

I’m not a risk-taker, far from it … to me, the so-called controversial move is usually not “a.k.a. taking risk” …

… blindly following Conventional Wisdom can be the riskiest move of all because you may unwittingly be risking a good proportion of your financial future!

To prove my point, and (hopefully) change the way that you look at investing in your 401k forever, let’s take this example from another comment to that same post, by Alex:

This strikes me, in a good way. I am about to be eligible for the 401k at my company. Normal people who cannot think of anything else better (and safer) than sticking their money in the funds.

Correct me if I’m wrong, what you are really saying is: instead of saving diligently and sticking $30,000 into a fund, maybe that same $30,000 can be used as a down payment for a rental property that will both appreciate and generate cash flow.

Now, I cannot advise Alex – or anybody else – on what to do with their money … that’s the job of financial advisers.

But, isn’t it Rule # 1 of Personal Finance to FIRST PUT YOUR MONEY IN THE 401K TO GET THE COMPANY MATCH?

After all, isn’t that FREE MONEY?

If the employer matches your entire contribution, aren’t you getting a 100+% return on your investment … impossible to match anywhere else?

Absolutely, which is why almost every personal finance writer (be it books, magazines, or blogs) recommends to at least invest to the limit of your employer’s matching contribution …

…. except for one problem, this thinking doesn’t hold up to scrutiny!

You see, your money is in the 401K for the long-run (isn’t it?) … your contribution – and your employer’s match is only a Year One issue; over the long run, your Contribution (with the employer’s match) will tend to a much, much lower return.

Alex’s question is: will that $30,000 be better off in the 401k or in a rental property?

The only way to find out is to run some numbers over the expected life of your ‘plan’ to see what happens … fortunately, just like a cooking show, I have prepared the numbers for you and here are some very interesting results:

SCENARIO # 1 – Assumptions

A. Let’s simply take Alex’s question ‘as is’ i.e. make a one-off $30,000 contribution to the employer’s 401k:

We will assume that the employer is VERY GENEROUS and match 100% of the entire $30,000; and we will assume that the markets are equally generous and compound an 8% return for us – tax free – for 30 years.

B. Alternatively, we can put that entire $30,000 as a 20% deposit against a $150,000 house; and we will assume that it’s value increases by a more conservative 6% (also compound) each year. We will also assume that Capital Gains Tax (15%) is payable.

SCENARIO # 1 – Results

1. We know that in Year 1, the employer’s 100% match provides a 100% return on the 401k; but, in year two that return drops to 58% (the employer’s $30,000 ‘match’ effectively becomes a $15,000 ‘return’ over each of the two years … then add the 8% Net Managed Fund Return).

This rate drops each year – because we are looking for the equivalent compound return, it drops fast – so that it only takes 9 years for the overall compound return to drop below 20% and by Year 18 through to Year 30, it averages a compound return of ‘just’ 11% – 12%; still almost twice real-estate, though!

2. The total amount available to cash out of the 401k at the end of the 30 years is $559,000

3. However, if the entire $30,000 was used as a deposit on real-estate, even with a 15% Capital Gains tax on any increase, the total 30 year Capital Return will be $713,000.

That’s a 28% advantage by putting the $30,000 into real-estate instead of the 401K …

… a greater overall $ return even though the % growth was half that of the 401k!

How can this be so?

The power of leverage (we borrowed 80% on the real-estate and nothing on the 401K except for the employer’s Year 1 ‘match’).

But, wait, there’s more!

The property is an investment property (if you choose to live in it, simply figure that you pay yourself a ‘market rent’ and these conclusions still hold true) … so, we can assume:

That we fix the mortgage at 5.25% (that’s $8,000 a month), and average a 5% rental return based on current market value (means that our ending-rent grows to nearly $36,000 a year!), and assume that 25% of rents will go towards expenses (other than the mortgage) and vacancies (a useful Rule of Thumb).

4. The net income (with any ‘surplus’ over mortgage and expenses being held on CD at a 30 year average of just 5%) is an additional $217,000 for the real-estate option.

Taken together, here’s how it looks:

Total Return:

401k	$ 559,036	CGT+Income	CGT Only
Real-Estate	$ 930,476	66%	28%

So Alex, by (a) forgoing the exceedingly generous employer match in your 401k and (b) putting that $30,000 into a pretty tame residential real-estate investment instead, your overall 30 year return increases by 66%

Now, this is not how the ‘real-world’ usually works:

We don’t usually invest in one lump sum … we usually make annual contributions to our 401k of 10% – 20% of our salary. So, how does The Alex Plan work under this ‘real world’ scenario?

Let’s see …

SCENARIO # 2 – Assumptions

A. Let’s adjust Alex’s question to instead make an annual contribution of 10% of an assumed annual salary of $50,000 (4% inflation-adjusted, so that the contributions also increase by 4% each year) to the employer’s 401k:

We will assume that the employer will remain generous and 100% match the employee’s contribution each year; and we will assume that the markets are very generous and compund an 8% return for us – tax free – for 30 years.

B. Alternatively, we can simply put each year’s contribution in a bank account (earning a paltry average of 5% over the entire 30 year period):

When we save around $30,000 [Year 6] , we take that money out of the bank as use it as a 20% deposit against a $150,000 house; and we will assume that it’s value increases by 6% (also compound) each year. We will also assume that Capital Gains Tax is payable.

Once be buy the house, out bank account is depleted, but we are still saving 10% of the employee’s salary, so we start to build the bank account up again … of course, similar properties get more expensive, so we wait until we have saved around $38,000 [Year 11] as 20% deposit and buy our SECOND property … then we repeat: saving around $46,000 [Year 16] for property THREE, and around $56,000 [Year 21] for property FOUR and final.

Why final? Well, we are within 10 years of retirement, so the BEST PLACE for our final 9 year’s worth of annual contributions is probably the 401k … 9 years is simply not long enough to chance the property market (for this reason, we could even be really conservative and also forgo the purchase of the 4th property).

SCENARIO # 2 – Results

1. The numbers are too complicated to measure the effect of the employer’s match on the hypothetical return … but, the overall numbers are far more important.

2. The total amount available to cash out of the 401k at the end of the 30 years is now $1.8 Million (now, you know why you want to make annual contributions to your investment plan!).

3. With the purchase/s of the 4 properties (the last of which we hold for just 10 years), even with a 15% Capital Gains tax on any increase, the total 30 year Capital Return on the FOUR properties (plus the final 9 years of 401k savings) PLUS the net income for each of the FOUR properties, will be $2.4 Million.

That’s a 32% advantage by putting 10% of your salary into real-estate instead of the 401K …

Total Return:

401k	$ 1,833,746	CGT+Income
Real-Estate	$ 2,412,898	32%

Before you say, well 32% is just too much work to worry about … you’re not thinking like a millionaire. Over the 20 years, you will have built up enough equity in properties #1, #2, and probably #3 to also purchase properties #5, # 6 and possibly #7. And, so it goes until rich …

So, Alex, will you invest in your 401k? If you have a lump sum … I’d guess definitely not?

But, for your long-term savings plan: the 401k is certainly more convenient … but, is that convenience ‘worth’ $600,000 (or – a lot – more!) to you?

That’s only a choice that you – and, aspiring followers of The Alex Plan – can make 🙂

Oops … I just broke The 20% Rule!

Posted on May 17, 2008 by Adrian

Last days for ‘pre-applications’ to become one of my 7 millionaires … In Training! Click here to find out more …

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If you’ve been following this blog, you will know that I have a radically different approach to owning your own home than the Dave Ramsey’s of this world who advocate paying off your own home early:

To be fair, Dave and I are actually saying two different things:

1. Dave Ramsey is saying not to carry any personal debt at all – INCLUDING your own home, since it doesn’t generate an income. And, there are certainly many who advocate this approach.

2. I am simply saying that the EQUITY in your own home shouldn’t exceed 20% of your Net Worth.

Now, if your house is worth more than 20% of your Net Worth, and for most people it will, then by definition I am saying that not only is it OK to borrow the rest … you HAVE to borrow the rest!

When you are old and gray, then Dave Ramsey’s approach is fine … but, when you have a plan to retire wealthy, your home – and, your ability to borrow against it – become key.

So, when I told you in a recent post that my house was worth $2 Million … my wife and I actually met BOTH my criteria and Dave Ramey’s as we paid cash and the house fit well within the 20% Rule for us.

As it happens, I can’t stand to see a ‘dead asset’, so we agreed that I could take a substantial line of credit against the house (more than 50% of the current value of the house as a HELOC) and use it to fund some investments … I recommend this approach, even if you fit within the 20% Rule, because you should be maximising the amount that you have invested at any point in time …

… of course, as you get closer to retirement, you may choose to wind back again – as Dave Ramsey suggests – I haven’t, but that’s just me 😉

Now for a ‘small problem’ … a few days ago, we bought a house worth more than twice as much as our current house … at least, it had better be worth more than twice as much, because that’s what we paid.

This means that we have temporarily broken the 20% Rule … d’oh!

It’s not as bad as it sounds, but I wanted to share this story so that I could walk you through our thinking process, because it will be inevitable that you go through a similar process as you gradually step-up your lifestyle (the side-benefit for all of those who read this blog … we hope!):

1. We are taking a very conservative view of our Net Worth: I tend to discount the sale value of any businesses and similar risk-assets that we may have, when calculating our Net Worth, as they can be taken away.

With these ACTIVE assets included, we are well within the 20% Rule, and very close to it even when only counting PASSIVE assets (a MUCH more conservative way to view Investment Net Worth that we will discuss in future Making Money 301 posts).

2. We paid cash for the house (well, we have only put down the deposit, so far, but will pay cash at closing).

The remedy?

Simple: as we did with our current house, we will take out a home equity line of credit and use that for investment purposes.

This means that we have effectively shifted the borrowed portion of the equity in the house from the personal side of our ‘ledger’ (bad) to the investment side of our ledger ‘good’ …

Used this way, borrowing is a positive tool to be used to advance your financial position, which is why I disagree with the Dave Ramsey approach for those who need to step up their lifestyle and have a solid reason for doing so [read: driving desire to achieve some Higher Purpose in their lives] …

… or, if you prefer the Dave Ramsey approach, simply wait before buying the house.

Financial choices abound!

BTW: to be ultra-conservative, we may instead simply use, say, 50% of the equity in this new house (perhaps more, certainly no less) to secure further income-producing real-estate investments (rather than stock purchases) that we intend to hold for a VERY LONG TIME.

As our Net Worth rises, will we pay down that loan (i.e. HELOC)?

We could … as we would again ‘fit into’ the 20% Rule. But, we probably won’t – because the 20% Rule is a minimum standard and there is nothing wrong with investing more, particularly in conservative, long-term buy-and-hold investments.

I see holding such investments, and borrowing a reasonable proportion to fund them, as less risky to my financial future than the typical ‘save and never borrow’ approaches … but, only because my financial future has to be reasonably BIG … certainly more than a simple savings approach could ever achieve.

That’s how we deal with upgrades to our living standards … perhaps, it’s a model that you can follow, too?

Too scared to buy? That's OK … just jump in, anyway!

Posted on May 9, 2008 by Adrian

With anything that has a big upside, there is usually the fear of the downside, but I say:

No pain, no gain!

Think back (or forward) to your first real-estate acquisition – it probably was (will be) your own home.

Fear? Sure … in a ‘down market’ there are perhaps well-founded fears that prices could go even lower.

Does this mean that you shouldn’t buy a house? That’s up to you.

But, here’s what I think:

First, you should always seek out and listen to expert advice … that is advice that comes from:

(a) Somebody who understands the game – that would be a Realtor, and

(b) Somebody who has made a lot of money in real-estate – that would be me 😉

Follow what your Realtor says, but don’t be paralysed with fear …

If you find THE house that you like AND you can afford the payments, go ahead and BUY.

Just be sure to lock in a loooong (say, 35 year) mortgage at current rates (still a very low 6%).

Time – and low current interest rates (which is why you MUST lock in for as long as you can) – will ‘cure’ any mistakes that you do make … after all, mistakes can happen despite following all of the good advice that others will give you.

But, real-estate is (perhaps, surprisingly, to new investors) very forgiving if you have a long-term view …

And, I am a firm believer that owning your own home is the START of your path to wealth.

Even so, it’s OK to feel at least a little FEAR and TREPIDATION when you submit that offer …

… so that you will feel at least a little better, let me tell you about the real-estate transaction that scared me the most:

About 5 years ago, I decided to move offices. Even though I had already made some smaller real-estate investments, I had always rented my office space.

My accountant suggested that for this move, I should BUY my own office building!

Now, my business was just beginning to make (still very, very little) money after years and years of losses, so you can understand my first words to my accountant: “Say what, Fool?” 😉

On top of that, the building that we had targeted was selling at auction … and, there were a ton of people at the on-site auction, all looking very intimidating and all looking like they wanted to – and, could afford to – buy … holy sh*t … scary stuff!

Now, I don’t recommend that anybody (bar an expert) buy at auction – just too many unknowns to deal with – but, I somehow ended up with this piece of real-estate for more than $1.25 million …

… and, it still needed another $500,000 in renovations and office fit-out before I could use it!

Long-story-short:

We bought the building with 25% down and we leased all of the renovations and fit-out.

I sweated every payment for the next couple of years, until the cash-flow in the business caught up with (and, thankfully, eventually overtook) the mortgage and lease payments.

Just a few short years later, I sold that business, then the building … I made a cool million dollars on the sale of the building alone; that’s $1 million that I would NOT have had if I hadn’t made the leap to buy it.

In parallel, I kept building my real-estate portfolio, using the ‘spare cash’ that my other businesses produced … most of which I still own (the real-estate, not the businesses … I usually don’t advocate buy-to-sell for real-estate … the office building was an exception).

But, that office building was still my scariest – yet, one of my best – Real Estate transactions, to date.

So, if you are thinking of buying some real-estate (be it your own home, own office, or a rental) and can afford the payments, I say:

Go ahead and jump right in … after the inital shock, the water’s fine 🙂

The 6% Realtor Solution

Posted on May 3, 2008 by Adrian

Last days for ‘pre-applications’ to become one of my 7 millionaires … In Training! Click here to find out more …

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To get a Realtor or not to get a Realtor, that is the 6% question …

Joshua asked a question about a recent post:

I’m planning on buying a condo soon … fixing it up a bit and renting it out … but how would someone “educate themselves daily on the market”? I keep an eye on the 30 FMR and am impressed with rates right now but I’m wondering if there’s more to this education.

If you’ve been following this blog, you’ll probably also be thinking that now might be a great time to be buying some real-estate: a house, a rental house/condo, duplex/triplex/quadraplex, retail/commercial, office or industrial … the choices abound!

No matter what you are thinking of buying, once you have done some of your own homework and narrowed down (a) the type of real-estate you want, (b) the price range that you are interested in, and (c) the area/s that you are looking at …

… then find a Realtor who will send you ‘comps’ (i.e. comparable sales) on similar sales in the area from the Multiple Listing Service (MLS).

Also, ask the Realtor for information that will help you find how the market has changed over the past couple of years … do the same with rental ‘comps’.

Also, physically look at a number of similar properties in the area/s that you are interested in before choosing one.

Of course, you can get some (most) of this information from public (many free) databases … just Google ‘MLS’ for listings of properties of the type that you are interested in, and sites like rent.com for rental rates on apartments and houses. Sites like realtytrac and loopnet are great for commercial.

But, there are some big advantages of using a Realtor:

1. Qualification – these guys are trained (more so than a ‘standard’ real-estate agent … the ‘Realtor’ designation actually means something!) and if they have worked in the market for a while, they will know what you are looking for before you do.

2. The MLS listings that they can get you are far more detailed than the publicly available ones.

3. If they own and invest in the same types of properties in the same areas that you are interested in, they can be a great resource (AJC: this should be the first question that you ask … only deal with an Investor/Realtor who already invests in the same type of real-estate that you want to be investing in, and in the same or similar area/s).

4. They will represent you in the purchase and the other guy (i.e. the one selling the property) pays their fee – they typically split commissions with the selling agent.

So, the seller’s 6% commission pays you for a ‘free’ buyer’s agent … just choose the right one … OK?

STOP PRESS: Investor Finds Bank-Owned Bargains Galore!

Posted on April 3, 2008 by Adrian

I am (temporarily) shelving today’s post because a very interesting e-mail arrived in my in-box last night.

It was an e-mail newsletter from a foreclosure and real-estate listing service that I use, called RealtyTrac.

This particular article caught my eye, because I love anything that shows that real money is made when you ignore conventional wisdom; the headline read:

Investor Finds Bank-Owned Bargains Galore

“I just bought two brand new homes as REO from the bank,” said a Tennessee-based investor [Kirk Leipzig] in December. “I am buying five more new homes next week from the bank. I am buying $750,000 homes for $450,000 … This is the time to buy, and to make a killing out there,” continued Leipzig, who’s been a RealtyTrac subscriber for about nine months. “But you need to totally understand your market and educate yourself daily on your market. Then go buy, buy, buy.”

What’s most surprising about Leipzig is that he is not buying and holding – as many experts recommend in a down market – but buying and flipping.Now this really goes against conventional wisdom i.e. “housing prices are low … they can only go down … nobody is buying … you will be stuck with real-estate” …Maybe all true … maybe not … who knows? But, this guy has an answer for all of that:

“All the properties I currently buy are for flipping only,” he said, acknowledging that he always has a backup plan because of the difficulty selling in the current market. “I always buy a property now to flip, but in the back of my mind I know I can lease-option it, or rent it if it does not sell as quickly as I would like.”

I have to admit that ‘flipping’ real-estate is not in my particular comfort zone – I have never flipped anything (unless you call ‘buying’ majority share in a business for $0 down and ‘flipping’ it 18 months later for $6 million … but, that’s another story) …

However, for those of you looking to take some risk in what I would call The Business of Flipping Homes” as a somewhat risky way to make money in the short term (i.e. with a possible very large reward if you can replicate what this guy is doing) in order to then INVEST the excess proceeds into your long-term INVESTING (i.e. buy and hold) strategy, this just may be worth considering?

Whether you try and replicate what this guy does, in your own market, or try something else entirely different in the real-estate field “you need to totally understand your market and educate yourself daily on your market” …

… then, don’t just sit on your thumbs along with the rest of the herd … do as this successful business person does: go buy, buy, buy!

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A very useful tool for serious real-estate investors …

Posted on March 8, 2008 by Adrian

I often get asked about what tools I use for analysing various investment: for example, businesses, stocks, or real-estate.

Today, let me tell you a little about a very useful on-line data service that I use (and, you may have at least already heard of) called RealtyTrac … if you are an aspiring real-estate investor, this is definitely one of the tools that you will want in your kit-bag.

RealtyTrac is an on-line database, primarily known for listing foreclosures, but it also offers so much more:

Real-estate of all types (from homes to huge commercial developments); Foreclosure listings across the country; For Sale By Owner (not as many as the MLS, but you will find quite a few); Bank-Owned; and, Pre-Foreclosure.

The last two are the ones that you want to get into, because foreclosures can be difficult (often auctioned and you can’t be sure about title etc. before you buy) and because these last two are more like ‘normal’ purchases …

… that is, you can plonk down some refundable earnest money and do your due diligence before you buy. The rest of the sale process is somewhat similar to any other real-estate sale, but at generally ‘distressed’ prices … at least, if you are patient, selective, etc, etc.

For example, right now, I have set RealtyTrac to look for commercial property – retail, office, industrial, apartments – in the $1 mill. – $3 mill. range.

I have asked it to show me real-estate within the geographic areas that I am currently interested in, and of those last two types (i.e. Bank-Owned; and, Pre-Foreclosure).

I have recently added For Sale by Owner, because in the commercial sector 99% of owners will still have an over-inflated view of the real value of their real-estate, but 1% may have an under-inflated view (they may not have really researched the market; they may have under-managed, hence under-rented their property, etc.) …

… But I also have some pretty specific financial criteria that whittles down the hundreds of properties that may be within my nominal range … I will be happy to share these in a later post if enough people want to read about it.

I think RealtyTrac costs about $35 a month, so you need to be serious about buying before you signe up … but you can start a free trial if you just want to ‘kick the tires’.

Be warned: they take your credit card so be sure to call up and cancel before the trial period is over and they automatically start charging you!

Making Money 201 – Going for Broke!

Posted on March 3, 2008 by Adrian

If Making Money 101 could be drastically over-simplified as ‘saving’; then Making Money 201 is equally over-simplified as being about building your income.

If you were serious about getting your financial house in order quickly, then you probably already did some income building to help you pay debt off quickly while you were working your way through Making Money 101.

Unless you’re a CEO of a Fortune 500 company, or a top professional doctor / dentist / attorney / accountant, then you will need to think about starting a business.

And, to accelerate your business or professional income you may also decide to get into the business of active investing (renovating/flipping real estate, trading stocks and options, etc.).

This is the stage that you get to take RISKS (that’s why you need a solid foundation and plenty of runway … you WILL fail at least once, twice, three times …) because that is the only way to get the big financial REWARDS.

This stage is hard work!

But, it is where you actually sow the seeds that will eventually make you rich …

There are plenty of books and a few blogs around, but most of them are specific to just ONE WAY of making money … the author’s way; some are good and some are lousy.

By the end of this stage you will be earning more than 90% of the US population and will be accelerating rapidly down the runway to financial health … but, spending will also increase dramatically and you will struggle to hang on UNLESS you ALWAYS remember your Making Money 101 lessons about saving!

Paradoxically, you will be the ‘richest’ that you will ever be in your life during this stage IF to you, being ‘rich’ means being able to spend lots of money …

… the problem is that your ‘wealth’ is only based upon your income, therefore only lasts as long as your business or job does.

Also, many of the Making Money 101 rules now need to change, as do almost all of the tools ….

For example, dollar cost averaging and index funds are replaced with sensible investment and savings rules and strategies.

You are still far from ‘rich’ …

In fact, you are still Just Over Broke … but, starting to break free!

The 4-step, never-fail plan to making a fortune in real estate …

Posted on February 29, 2008 by Adrian

There is a lot of BAD stuff written about real estate and a little bit of GOOD stuff … start by finding and reading some of these good books (google “John T Reed” and see which books he recommends and which ones he pans).

The truth is that most people MAKE money through a business, then KEEP money by investing in real estate.

If you can’t (or won’t) start a business (even on the side) then you can at least accelerate your LIFE SAVINGS PLAN by buying and holding income-producing real-estate.

Right now, it’s very simple:

1. If you don’t yet own your own home (but would like to) BUY one now and LOCK in the interest for 30 years.

Why?

Home prices are relatively cheap (if you think they will get cheaper then wait a little longer … if you’re not SURE they will get cheaper, buy now).

Money is cheap – mortgage rates are probably 2% lower than they will be by 2009 or 2010.

You want to keep buying that cheap money for as long as possible …

… but, only IF you are prepared to take the next step, which is to …

2. Assess the increased / excess equity (what your house is worth – what you still owe) in your house yearly and use that excess equity to buy another as soon as you can scrape up a reasonable deposit (20% if you are conservative).

3. Lock in the interest rates for 30 years; rent the property out; keep raising rents; reassess the value of all of your properties yearly.

4. Repeat until Rich!

Now, this will take 10 to 30 years … to accelerate: start that little (or big) side-business and use the excess cash-flow to buy more investment properties rather than Porsches!

Simple … and, you couldn’t be starting at a better time in history.

7million7years

How to make 7 million in 7 years …

Category Archives: real estate