I pay double digit returns on your hard-earned money

As the real estate cycle changes I now find myself investing again in bank-owned properties. This is how I began 11 years ago at the bottom of the last cycle. What a ride that was!!! Currently the market is much more appealing to a real estate investor than it was back then. What I am buying currently cashflows at 15-20% without financing! Imagine the returns using financed money! As we all know, the banks are in a mess, and getting financed can be a long process. They are so over-whelmed that the simplest transactions take 45 days. Enter…. Private money. This is business with the people for the people! Back to basics! Most people are getting watered-down returns (if any), in part due to the fact that there are too many middlemen and also due to the fact that investments open to the general public have to be ’sanitized’. By this I mean, it has to be ’safe’ and that anyone can do it without using their brain. Unfortunately too many people rely on others to make the most important decisions of their life. We need more accountability from ourselves. Nothing ventured, nothing gained. If you don’t want to think for yourself, you are stuck playing someone elses game, by their rules, and getting paid for your involvement. If your involvement is less, you are paid less. If you really get involved, you will really get paid! This is true for many things. Why not earn more on your money? Numbers don’t lie. I know I can pay these returns day and night no matter what happens, because I do the numbers every day. Whether a property sells or not does not matter with the cash flows that can be generated by these properties. The valuations are so low right now compared to the height of the market, that to build these properties you would be paying double the current prices. I’ll get off my soap box for now, but feel free to contact me and learn how to put you back into control of your finances!

FHA Loans and your retirement

What is the link between FHA financing and retirement? It’s the easiest and most powerful way I know of for realizing a retirement that isn’t at poverty level. This way can actually make you a millionaire and you can start from $0 as long as you have 2 years work experience, a certain level of credit score, and are able to qualify for the payment. As long as you can document all this, you are on your way.
If you understand 3rd math, you can do the numbers! Real estate investing in essence is truly simple, and open to the masses. Obviously there are almost infinite variations on any given scenario, and this is one of the greatest parts of real estate investing. You can tweak it in so many ways according to your specific goals, talents, etc. I’ll start at the bottom (which is where I started) from next to nothing. When you start with a first home with 3% down (FHA financing) and have seller pay closing costs, you are actually in the most powerful leverage position. You can even have the 3% gifted to you! If you figure an average appreciation of 5% and a house value of $100,000, after 1 year you would have $5,000 in equity buildup. Since you only started with $3,000 your return would be 166%! That is only the average-that is why it is so important to put in the sweat equity into your first home-the returns are astounding! Once you buy investment property your average return with the same appreciation would be 25%, since you have to invest more of your own money, typically 20% down. Make the most of your situation!
The actual dollar numbers are not very exciting to begin with, but as an investor you need to look at return on investment to understand the power of real estate. I would regard this as a lousy return and try to tweak it by working on the house and creating more value (spend a small amount of money & create the biggest bang for my buck). When you get into millions of dollars worth of real estate the percentages turn into big money.
Progress can seem slow in the beginning, but remember you are living in this house doing whatever it is that you do, and your house is doing this by itself on the side. These returns can be much bigger if you buy this house at a discount (if it’s bank-owned or a short sale and you bought right you should have equity by the time you move in), buy it at a low point in the real estate cycle, create some sweat equity yourself, buy the dump on the block (my personal favorite), etc. As you acquire more rentals, you are making the same percentage return but on a much bigger dollar amount. If you own a million dollars of real estate and get an average of 5% return, that is $50,000 that first year! What follows is an example of how I came to appreciate leverage.
Our first home that turned into a rental required a $7500 investment plus approximately $5000 and alot of sweat. We sold it after 2 years and netted $55,000 after all associated costs. That works out to 440% return over two years or 220% annual return. This would have been higher had we known we probably could have got closing costs paid by the bank! Then our 3% down would have been $3,750 plus $5,000 in remodelling costs or a total of $8750. Our return would then have been 628% total return or 314% annual return! On our home, I don’t even know what kind of return we’ve gotten out of it! We took out money to buy the first duplex, and then much later took out more to buy others. We made about $55,000 after holding onto the duplex for only a year. That was 100% financed, since the down payment came from our home refinance, and the rental income covered the expense of borrowing it, so how do you figure your return on investment-it’s infinite! How’s that for a great return? This is actually common in real estate. Where else can you do that?
Once you get started and buy your first investment property think leverage, specifically 5 times what you have to invest. You are making 80% of your returns using the banks money. Another way of looking at it is whatever gains you realize on the value of the property, multiply it by 5 times. That is your return on investment.
When you have enough equity to put down 20% on a rental, refinance your home or get an equity line and take the cash out (not for vacation, boat, fancy car etc.) and buy your first rental. Do the math and make sure your rents will cover the mortgage payment plus the cost of borrowed down payment (equity line), with a little extra cash flow on top. You can get a mortgage calculator or book with tables to figure monthly costs. You might elect to have your first rental managed by a management company, usually for around 6% of the monthly rent plus 1 months rent fee per tenant moved in, until you are more comfortable with it. Our first was managed for the first year, after that we figured we could do it, and never looked back. It’s about comfort level as well as how fast you want your money to grow. There is a trade off.
Once you have your first rental, you now have 2 homes growing at 5% annually, so you are increasing your velocity of money. Your equity begins to grow faster as you accumulate. You can look at your rentals as super-charged 401ks (except way better), each one growing by itself with your guidance. After your first house or two, you shouldn’t have to work for the money to buy the next one. Your houses are now working for you. The next purchase will come from one of your existing rentals, and so on and so on…. It could take you as little as 7 years to create a million dollars of net worth if you could start with two homes ($7,500 initial investment each).
If you already have a 401k or money sitting in a CD you can get there even faster!

Got 3rd grade math? Why aren’t you wealthy?

Real estate investing is about the only field open to just about anyone who can do 3rd grade math. For the average person the entry requirements are about as low as you can get, with the rewards being almost limitless. (See Robert Kiyosaki, Donald Trump, etc.) In these trying times, it can seem like only the big hotshots with money have a chance at a great retirement. With downsizing, out-sourcing, benefit cutting, and corporate CEOs making monstrous salaries and bonuses, the average guy seems to be getting squeezed!

Luckily, there is still real estate!!! And despite the media doom & gloom routine, there is a huge opportunity right around us right now as we approach a bottom in this market. Nationally, there is still a downtrend in housing prices, which most of us would agree with, but you must remember real estate is local and there is always a good deal to be found even in the worst markets. Our local market here in the sacramento area is offering a great entry point right now, both for real estate newbies and the seasoned investor. Seasoned investors are snapping up the deals already, and here in sacramento multiple offers are becoming common again. The low end of the market, specifically the foreclosure market is hot, the mid-range is stagnant, and the high end is okay.

Cashflowing investment property in California on a 30 year fixed rate mortgage (principle & interest)! I thought I’d never say that again after the last several crazy years! The real estate market correction is a healthy allthough in many cases painfull! Many lessons have been learned the hard way.

So why isn’t everybody buying rental properties, if it’s such a no-brainer? The truth is that one of the qualities you need as an investor is financial discipline which comes through education (hard knocks school or otherwise), alot of determination, stamina, resourcefullness, and a somewhat adventurous spirit. You must be okay with alot of advice given freely by friends, neighbors, family, friends who have real estate licenses. Unfortunately most of the ‘expert’ advice you get here will come from news programs, old wives tales, one-liners, and people who have never invested in real estate (or people who invested poorly and had a bad experience). This usually creates a fear among many people, and that will be the end of that great idea! If you listen to this and/or the media too much you won’t do anything period. Most of the news is reported because it’s sensational or bad-whatever gets you to listen. It’s the same with real estate-everyone has heard the landlord horror stories. Okay… enough with the chicken little stuff!

So…. If you were to find a rental property, put 20% down, rent it out, have your tenant pay for the mortgage on it, and get $200-$500 above what it costs you every month, would that be good? Since you bought it discounted from the bank for less than it’s worth, didn’t you just make money? And 1-3+ years down the line you sold it (better yet refinanced, took out money and bought another!)and made a chunk of change, perhaps 100% return on your money? Wouldn’t that be great? Sound like a pipe dream? Some people do it all the time (and in their spare time). You must take the first step.

So… It will be your 1st home and you don’t make alot of money… Even better! You can get 100% financing still if it is owner occupied, or with 3% down, and ask for closing costs to be paid by the seller. Live in it for a year or two (or more), fix it up, sell or refinance, and buy another. That is how I started 10 years ago, and that is why I’m such a die-hard real estate junkie.

Need more to get started? You know that on average, 65% of your wealth at retirement is in your own home? The 35% of the wealth we have other than that is what we’ve managed to squeeze out of a paycheck to save over 30-50 years. With real estate investing done the right way (there are alot of right & wrong ways to do it!), your tenants pay your mortgages, allow you to hold for indefinite periods of time to take advantage of appreciation, and the IRS lets you take advantage of the tax laws to reduce your income tax on top of it!

It’s really a very passive form of investing, and can be done according to your taste-you can jump in full bore, or you can do it at an almost painfully slow and boring way and end up with astonishing results either way. By the way I’m full bore in case you didn’t notice!

Another note… Please do yourself a great favor and stay away from the real estate gurus, investment clubs, etc.. I know-I’ve been there, done that, spent money there, and to be fair did learn some things, but to be truthful, I should have just bought some more real estate instead! All you need is a good real estate agent and loan officer who are investors as well. This is my pitch in case you didn’t notice. All the gurus seemingly have this new product or secret that nobody else has (salesmanship is really what it is). There are no flashy secrets to wealth building, just repeating the same thing over and over, hopefully learning by experiences and applying new knowledge to better replicate again. Sound boring? In essence it is, but I admit I can’t help getting excited about it because it’s so simple yet soooo rewarding. Unfortunately boring won’t get you to sign up for real estate seminars! Good marketing will though- it worked on me. All the seminars had the same affect on me- I got excited, ran around in circles trying the ‘new’ stuff and then realized that I was wasting time, energy and focus-it was just another diversion sidetracking me. I guess it’s human nature to make things more difficult than they are.

Blue Light Specials

Don’t want to repeat myself too much, but helloooooooooo! Is anyone out there? It is the time to buy!!!!!!!

Discount prices everywhere-it’s like being a kid in a candy store!

In many areas prices are 50% of what they were a couple of years ago, and in some areas multiple offers are becoming common (at least for bank-owned real estate). I know the nay-sayers are thinking (and the media) that prices are still on the way down, and to keep waiting, but I am seeing the smart money buying up homes that are 350K and under. Also wishing I had extra cash to dive in (or cash partner)!  In real estate a good deal is a good deal even in these uncertain times.

It’s a perfect time to find a foreclosure that needs work that’s at a discount price. Putting sweat equity into real estate is a great way to ensure that your great deal will make you money (now or later). You can fix it and flip or hold and rent it out-never thought prices would come down enough to cashflow in California again!

If you are a first-time home buyer, do an FHA loan (3% down-have seller pay closing costs and buy down your rate). If you are at all handy, you should buy a fixer and put your own sweat equity in it until you have enough to take money out and buy another. This is what we have done several times.

For those of you in the construction trades, this is a no-brainer! Did you know on average 60% of your net worth at retirement will be in your home?! (This is what the National Association of Realtors said just the other day).   That means just owning 1 home will provide as much savings as 60% of your working life.  If you work from age 20 to age 60, that is 40 years of work (60% of that is 24 years of work & savings labor!). I don’t know about you, but in my years of contracting I wasn’t able to create any sort of savings, let alone retirement. I paid bills and that was about it!  Everyone also knows that being in the trades is hard on your body. If you are self-employed (like we are), no-one is planning your retirement except you (hopefully!). As far as I am concerned there is no better way to do this. With construction knowledge, you have so much of an advantage over anyone else, as you can accumulate wealth through sweat equity for astonishly little cash.

Even if you are not in the trades, an average retirement is no picnic. Nobody wants to work their whole life and then retire in poverty that I know of.  These days everyone needs to take personal responsibility for their retirement-the days of secure jobs and great retirement are over unless you are a CEO and have a golden parachute or have an inheritance. Relying on somebody else to look out for your financial well-being for your ‘golden years’ involves a huge risk of ending up with potentially nothing.

Anyway…..Enough of the soapbox!!!!! I get frustrated when I see opportunity knocking and not enough people answering! This method of retirement only takes 3rd grade math! To be fair though, it takes alot of work, courage, and determination to do it, and many are not willing to think out of the ‘box’ and take the 1st step which is always the most important one!

It’s simple, and this could be why not so many will do it, because if it was so simple then why isn’t everyone doing it and retired already? It’s a natural tendency to make everything complicated-most of us do, me included! There are so many real estate gurus out there, and people like the idea that someone might have the secret answer to answer all their financial problems. Part of the problem is that you need to pay these people for their ’secrets’. I know . I’ve paid many of them and to be fair have got valuable information from them, but have always come to notice that there is no ’secret’ and that the actual actions needed are extremely simple and involve large amounts of common sense. Talking to people who are in the business and investing in real estate also, is one of the best ways (and cheapest).

And now for my plug! If you are going to buy real estate and using a Realtor and Lender why not use someone  (us of course!) who invests themselves  in real estate for retirement, and who will gladly help you do the same for FREE!

Thanks for reading!

Why you should buy a fixer-upper bank-owned home now!

As everyone knows, there are alot of foreclosures on the market now! The smart (and big) money is snapping up the deals in large quantities often paying 55 cents on the dollar. I always think that it is good to study successful people who are doing what you would like to do, and learn from them instead of trying to reinvent the wheel! Although individuals by themselves can usually not duplicate these results on the same scale, they still may be able to gain great returns on their money, whether it is an investment property or their own home. For many reasons it is easier and cheaper to get into the real estate market right now by buying your own home this way, and also start creating a retirement at the same time (not the social security type which may or may not exist when you retire, and which may or may not be enough to live on!).  The reason for buying this type of  home now  is that it is a buyer’s market for one,  prices have come down (blue-light special, buy it when it goes on sale, buy low), and buy at a discount from the bank who does not want to be in the business of owning real estate. Banks are penalized for having properties on their books, and savvy investors know that they may sell for a 25% discount on an already discounted listing price. Now for the fixer-upper part, which is like turbo-charging the whole idea! Fixer-uppers are also another way of acquiring  a property at a discount and putting varying degrees of sweat equity in. For a first time home buyer who can get 100% financing, one of these properties can double as a home and an investment account with rewards far greater than any other investment vehicle available.  Starting with nothing, sweat equity (free), a few well-placed and frugal dollars, and some time, you can reap exponential returns!  This is not for the lazy or fearful. It requires hard work, faith, and determination, and almost always a willing partner! I know of no other way that you can start with nothing and end up in the millions of dollars, way ahead of where you would end up with a traditional financial planners recommendation. To retire these days just about everyone needs to turbo-charge their retirement plans,  unless you don’t mind the idea that you probably will outlive your money even on a just ‘getting by’ retirement plan! I don’t know anyone who wants to lower their standard of living when they retire!!! Nancy and I have personally followed this turbo-charged plan (minus the bank-owned part) for 9 years. As a Realtor and Lender, we can help turbo-charge your plans!  Shouldn’t your Realtor and Lender live their career? Do they do what they advise you to do?  We are here to help and guide (if needed or wanted). Fear is what stops most people (and our great media outlets who encourage us to think like ‘chicken little’). The unknown is what creates fear in people. For me personally the idea of a mediocre retirement is way scarier than the idea of thinking outside the box now and doing something about it. It’ never too late!!!

Foreclosures and Bank owned properties

Foreclosures and bank owned properties are a hot market these days for many reasons. Unless you’ve been hiding under a rock you probably know it’s a buyer’s market! Great deals are to be had! There are a great number of Placer County foreclosures available. The advantage of bank owned properties is that banks don’t want to own real estate, because they are penalized for having bad loans on the books, so they discount the property. Apart from this,  it’s also common to get accepted offers at another 25% discount off of this price. This results in bargain deals!!!  As savvy investors know, you want to buy when things are on sale, which is definitely now. Our last deal was appraised at $621,000,  our clients bought it at $535,000! This was a beautiful,   unique property with deferred maintenance, and a great deal! They are now looking for their next great deal.

How to Retire Rich & Young!

Many people have the appearance of being rich or wealthy! Many of them also are renters living on the edge! And some of them are past and present renters of mine!! Being wealthy and looking wealthy are often on opposite sides. As a lender I see what the true financial picture is-no fuzzy logic here. It prompts me to mention a couple of things to inspire people who would like to retire!! Looking wealthy is an expensive and self-defeating proposition. Being wealthy requires determination and some sacrifice, but the alternative-work your whole life then try to survive- doesn’t seem to be a great option either! Giving your money to someone else to invest usually insures a meager return on your investment. Now for the silver lining! Investing in real estate is and always has been a powerful method of acquiring wealth (just look at the truly wealthy people and you’ll notice most either hold their wealth in real estate or made it that way).  One can start with literally no money and good credit, and create a fortune. If you don’t believe it talk to me. Most of the power of real estate has to do with leverage and appreciation (here in California). With 20% invested of your money, you can make 5 times the appreciation rate which has been 8.7% average over the last 40 years which is an average of 43.5% return on your money! Where else can the ordinary person achieve this rate of return??!!! Personally I have achieved a rate of 185% ROI during the last 7 years! This has been due to A) personally rehabbing properties B) renting them out, C) selling a few, but keeping most, D) above average appreciation the past few years, E) determination, F) a lot of education from personal experience, experiences of others, seminars, mentoring, etc, and last but not least G) the use of ordinary practises that most people can understand anyway such as buying and selling real estate, using mortgage brokers and real estate agents.  There are no big secrets to this, and usually the simplest of plans will get you further than trying to buy discount properties  through foreclosure or other creative means. If you are more sophisticated, these may work well for you, but definitely are not necessary. I find many people who come to me and want to invest in real estate have the nice house and cars, and have pulled out equity from their home to afford it, leaving little room for investment. I only wish they had come to me sooner! If there is equity in your home, and want to invest, you may want to refinance and pull cash out to invest & start your journey to a great retirement!!! It’s all about the numbers, and everyone’s situation is different. As I said before you don’t have to start out with money but it is important to have good credit or at least know what your score is and start working on it sooner than later!  The techniques I use for investing are simple, and require 3rd grade math and some common sense!! No excuses ! This is not rocket science! Many refinance and pull cash out for vacations, cars, etc. If you aren’t already set with your retirement plan, this a great way to never retire!!! It’s ironic that most of the mortgage companies advertise refinances as a way to get the toys everyone wants instead of using the cash to buy investments that will provide cashflow to buy the same toys and become wealthy! This is marketing at its best-they know everyone wants the toys, and people want instant gratification! Who doesn’t?  Investing in real estate is not sexy or gratifying, etc to the general public, but I have to say, I love my real estate!!!!! It is so powerful and empowering!! Working for a living is not!

Mortgages in your Toolbox

Banks make money using your money-lots of it! Are you???

Banks love savers. Banks loan out about 10 times the amount of their deposits (or more correctly, your savings), to make a better return than they are paying you.

Your home and or rental properties can be viewed as a personal bank. Just by being able to hold onto them for a time period results in their growing in value. In California, during the last 25 years, the average appreciation has been 6.5%, around 2% more than the national average. Now… a 6.5% return on your money doesn’t seem very exciting does it? Of course not! That is a miserable return on your investment (ROI)!Now comes the exciting part, which is using leverage. A mortgage is a tool that has been typically seen as a necessary evil involved in being able to own your own home. The by-product of this is a powerful way to leverage a small amount of money, to create extraordinary wealth!! People who have used this knowledge to their advantage have reaped incredible rewards, transforming their own lives as well as many others.

A typical home purchase would involve usually a 20% down payment, and financing the other 80%. Thus, a $500,000 home would only require $100,000 of your money. The appreciation would be gained on the $500,000 amount not just your money, thus multiplying the power of your money by 5 times. 6.5% times 5 equals 32.5% return on investment (ROI). Try that with a mutual fund!! This is a still a pitiful return in my view. It is based on averages and does not take into account some of the best features of real estate, such as:

1. We’ve all heard of LOCATION LOCATION LOCATION!!! It doesn’t take a rocket scientist to pick a good location, just common sense! You can beat the averages easily here!!

2. Control. (not like the stock market or retirement plan!) A home is a readily marketed item at the right price-everyone needs a home!

3. Financing through mortgages. You can invest anywhere from $0 (100% financing with seller paying closing costs-very easily done) to paying 100% cash. Using averages, 80% financing would give you 32.5% ROI, 90% financing would give you 65% ROI, 100% financing would give an infinite return!

4. Management of equity. Extremely important and often overlooked. You can manage the amount of equity that you are putting into your real estate by the use of different types of loan products. This is a little more sophisticated and requires planning, financial responsibility, and a true commitment to your goals. One of these tools is the “Option ARM” also known by many other names. It allows for paying a lower monthly payment than the interest-only payment to decrease the amount of monthly cash outlay. This is another form of leverage. It is an adjustable rate mortgage and therefore must be used with care. As with many great tools (of any kind), the misuse and misunderstanding of them can result in disaster!! Everyone has heard of people who have lost their shirts in real estate! There has been a fair amount of bad publicity about adjustable rates and particularily Option ARM mortgages. I would just say that the products are not the problem, instead the person who is using the product in the wrong way, or does not understand how they work (more of this another day).

5. The simple fact that there is no more land being made, and that the population continues to grow exponentially, results in the inevitable increase in value of residential properties.

6. 3rd grade math is about all you need to know for real estate!!!

7. You can start from nothing and create massive wealth over time.

8. Did I mention leverage?

9. Timing. Another very important factor. Usually we think of ‘buy low sell high’. That is fine, but to me, the real power of real estate is being able to hold onto it for as long as possible (generations). You must buy real estate and have it make financial sense the moment you buy it. Many people will buy anything in times of great appreciation, and disregard their own rules for investing by getting caught up in the frenzy-this has happened a lot recently!!! They will buy it now for too much, banking on appreciation to turn a normally bad investment into a good one. This does work for awhile, but sooner or later they will be caught in a market correction (as we have been experiencing for about the last year), and risk losing everything. As a mortgage professional and a real estate investor, I have seen a lot of people getting caught in this latest correction. Timing is about buying the right investment at this point in time. In this type of market there are many deals to be had, simply because many people didn’t see this correction coming. As the great real estate investor/author Dolf de Roos said, “the deal of the century comes around about once a week” (this is as I remember it!)

10. Tax advantaged! This is also a big one! On residential property, the IRS lets you ‘depreciate’ the structure only over 27.5 years, meaning that in 27.5 years, it is considered for tax purposes to be worthless. We all know by now that property in fact appreciates! On rental property, this means you can recieve a substantial monthly income or cash flow and not pay tax on it. Also, if you recieve enough cash flow to be taxed on it, the rate is less as it is regarded as passive income, not earned income. Remember to consult your CPA as they are the experts!!

11. Refinance it!!!! As you make money, you can pull it out tax free as this is a loan (from your personal bank), and go buy another house/bank.

12. With the right mortgage your renter should cover all expenses on your property, plus give you a small positive cash flow every month! Each house/bank should support itself by itself, none of this negative cashflow that makes you slave to support your properties!!!

13. If you must sell rental property, use a 1031 tax-deferred exchange to roll into another or several properties. This means not putting your hands on your profits, but rolling them tax free into another house/bank. You may take some cash and pay tax on it if you wish-this is called ‘boot’.

….. I could go on and on and on and on,etc.,etc.-but I think I have made my point! This is what I practise and preach, so I can get a little carried away!