ADVICE FROM EXPERIENCE
The top 10 read posts of 2018.
Dealing with tenants was, as always, a big draw.
When Tenants Overstay Their Lease
The One Clause Every Lease in Tennessee Should Have
My Tenant Called The Cops On Me
Do You Refund Tenant Security Deposits?
Are Your Properties In An LLC? Evicting A Tenant? Read This First
On this Christmas Eve I want you to think a little about the best present you can give yourself. This present may not be what first popped into your head. It is not cash, or gold or even real estate. It is the control of your time. Your time is by far your most valuable asset. With time you can build wealth and do all those things you dream of doing.
Gaining control of your time should therefore be your first priority. It should be your number one goal. There can be many things utilized to achieve that goal and real estate investing should play a role, but not be the primary goal. While gaining control of your time and becoming a real estate investor may certainly be related, there is a distinction between the two and your time is much more important.
You may dream of taking exotic vacations, of spending more time with your family and friends or just doing whatever it is that you like and want to do. Yes, some of those things will take money and real estate investing can get you that money but just having money is not the answer. Having control of your time can mean so much more and will lead you towards having the money to achieve your other goals.
There are many items in life that compete for our limited amounts time. Sleep of course consumes large portions but there is really no way around this vital function. In fact, I suspect many of us wish we had more time for it. Our waking hours are those that we should strive to gain more control over. Doing that often means finding new streams of income and creating new habits.
Creating new streams of income is how real estate investing can come into play. How? Real estate can provide cashflow and it is that cashflow income stream that gives you your time back. Good cashflowing properties will work for you 24/7. It will not matter if you are sleeping, at the beach or playing with your children, your properties will still be providing you with income.
Yes, getting these properties acquired and running smoothly will take time and lots of effort at first. Nothing worth having ever really comes very easily. This is where changing habits comes into play. If you stay focused on your goal you will gain control of more of your time and thus of your life. It really is the best present you can ever give yourself.
Of course many people out there enjoy the work they currently do. Their time as carpenters or research scientists or whatever provides fulfillment. Thus I am by no means saying that everyone needs to run out and think about how to get out of their job. But if you are in a position like I was many years ago and looking for a bit more out of life, then real estate investing is a way for you to move forward.
Make it a goal next year to gain more control of your own time. It is after all your most valuable asset. Start achieving this goal by using the time that you already have available wisely. Use it to study and learn. Use it to build relationships with people that can help you. It will be difficult at first, but striving to gain control of more of your own time is really the best gift you can give to yourself and those closest to you.
I hope everyone has a Merry Christmas and the happiest of Holidays!
The headlines some days are filled with significant amounts anti-real estate investor rhetoric. Flippers, landlords and developers are at times derided and scorned. There are calls for legislation and regulation. The real estate investor is seen as someone who is merely greedy and even harmful to society.
These views are however misguided. Many people, perhaps even many investors, do not understand the valuable function that we investors have in the real estate market place and in the economy as a whole. They misunderstand and miss what it is exactly that we do.
Honestly, these misunderstandings can be easy to develop as it can be easy to miss the role investors have. This is because the work real estate investors do is perhaps not as visible as the work others do. It can in fact appear that we do not do anything at all. After all, many of us do not swing hammers, cut the grass or research the titles. It can therefore almost seem like all we do is just stand around while everyone else does the work. However, while the efforts we investors put forth may not at first be evident, it does not mean that those efforts are not valuable and necessary. Without the work that we investors do, the hammer swinging, grass cutting and title searching would be harder to come by as well.
Real estate investors use their knowledge and skills to take risks. It is taking those risks that create the need for much of the work that others do. We investors make the deal come together. We put our butts on the line in hopes that we will make a profit. That is risky but taking the risk creates work for others. How? By finding a property we create the need for attorneys and others to seal the deal. By borrowing money we create the need for bankers and lenders. We repair and replace creating the need for carpenters, roofers, plumbers and other skilled trades. We coordinate all of these pieces to create something better, something that we hope society wants and needs. Taking that risk can sometimes lead to ruin. But if we get it right, we get rewarded and have incentive to do it all again.
Risk taking therefore plays an important role in our society and economy that is often misunderstood and undervalued. Imagine if risks were never taken. How would housing be provided? How would that shopping center be developed? Going beyond real estate, how would those phones have gotten in our pockets or how would this blog have even been possible? Without risk takers we all would live in a very different, and I think, much less fascinating and favorable world. Learning how to take risks is the role of the real estate investor. For whatever reason, that role is not fully understood or valued. So spread the word about what you do. Help others understand. Then give yourself a pat on the back. It is hard work to be a risk taker.
Dear Readers
,
What a week it has been for me! My apologies for not getting a post out today, but there is plenty coming soon.
I have a new podcast coming where I talk with the “Deal Architect.”
There are new articles on rehabbing in the works and a video as well.
I also have some new questions from the newbie I have been helping.
All of that and more is coming soon. So please stay tuned!
One of the fun things I do besides real estate investing is teaching at a local community college. The other day I noticed one of my students sitting in the hallway looking quite distressed. Concerned, I asked if there was a problem. The student noted that they were just overwhelmed and feeling stressed, that they did not know where to turn or what to do. “That is completely natural.” I said. “We have all felt that way at one time or another.” “Did you ask for help?” The response to my question was something I see way too often with students and real estate newbies alike. It was a half-hearted “No.”
I saw this encounter as an opportunity, an opportunity to pass on a lesson that we all have to learn. The lesson is that everyone will need help at some point in their lives and the best way to get the help you need is to ask. Asking for help should be something that comes naturally. To some people it is. But I think for many of us, asking for help can be a difficult thing to do.
Why is asking for help so difficult? There are many reasons.
We do not want to appear stupid.
We do not want to appear fragile.
Our egos must be upheld.
Embarrassment.
We are afraid of being judged by others.
We do not know who to ask.
In sum, we are human.
I used this opportunity to explain to this young student that the smartest and most successful people in the world understand that they have to ask for help. They know that they cannot do everything alone. They know that they would not have achieved success without the help of others. Asking for help is what the best and brightest do.
Robert Kiyosaki, a person whose writings have definitely helped me once said; “One of the biggest defects in life is the inability to ask for help.” And I think he is absolutely right.
We as real estate investors, we as humans, have to get over our inability to ask for help. It can be hard to do however because of fear. Fear of appearing stupid or weak and of being judged. Sure there are some that may feel that way but most people are more than willing to help. In fact, I think people generally appreciate being asked for their help. It makes them feel wanted and important. It makes them feel like they are able to do something positive in this world.
On the other hand, those of us who are more experienced and can perhaps offer help have to demonstrate that we are willing to give it. Be humble and inviting, kind and never degrading. Look past the mistakes and work towards helping people overcome them. Let others know we are available to help. We can do that by just repeating the message “I can help.” over and over again.
Wise people ask for help. Do not be afraid or embarrassed to ask for it. Most people want to help you be successful. Look for and actively seek help. Find someone at your local real estate investors association who has been through what you are going through. You just may be surprised at how helpful others can be.
The other day I was out looking at a property. It was a decent property with plenty of nice features but the value was just not there. If only this property was just a few blocks the other way I thought to myself, values would be very different. I went back to my office and got to wondering why values were so different. Why did a few blocks matter so much? Artificial boundaries seem to be part of the answer.
The property I was looking at was a grand old house built at the turn of the last century. It lies in a neighborhood that is surrounded by other grand old houses, many of them now cut up from single-family to multi-family units. Many of these homes show their age. They look a bit tired and worn.
Less than two blocks away across a major boulevard, sit very similar properties. The street names are the same. The lots are the same. The homes are of the same style. Yet values are much higher.
Why then the big difference in values when so much is the same? With a little investigation, I found two artificially created boundaries. These are zoning district and school district boundaries. These artificial boundaries have had a large impact on these two areas.
The areas I’m talking about were developed at a time before zoning was very common. Back then, neighborhoods tended to develop a bit more organically as opposed to the more rigid “planned” manner they are today. Land uses such as single family homes and four-plex apartments were often mixed together. This mixing of land uses worked to prevent concentrations of apartments or rental properties, making it difficult for any one land use to have a huge effect on values.
After World War II, things changed. Zoning took hold. Zoning by its nature is very rigid. Land uses were separated, with single family being located in one area and multi-family being located in another. The boundary between these two types of land uses was the major boulevard I mentioned. Why there? Who knows? But the effect is evident. By concentrating allowable multi-family uses in one area, the old homes were slowly converted over time. There are a few single-family homes still located in the area but their value has been reduced. After all, why would a homeowner want to live in an area surrounded by apartments when they could go two blocks the other way and not be? These homes were effectively removed from the single family market but the demand never lessened. Thus, prices for those in single family only zones rose.
The school zone is the other boundary I discovered. The major boulevard is also the dividing line between school zones. On one side, the school district is perceived to be much better, not so much one the other. I really do not know about the actual performance of either school, but I do know that perception is often reality. People will pay to be located in what is perceived to be a better school district. They will not pay for what is perceived (rightly or not) to be a lesser quality school district.
These artificial and arbitrary boundaries matter. They matter greatly. As such, they are items that a real estate investor should investigate as they are examining properties. Today, with most information easily available on the internet, it is fairly easy to do so. I would even suggest taking some time and examining the zoning and school district boundaries for your particular market. Get to know them and know how they affect values. Knowledge is power and location, location, location are the three most important words in real estate. Knowing the location of these two artificial boundaries may just give you that extra step you need to keep ahead of your completion or out of a bad deal.
The IRS recently announced new annual contribution amounts for owners of self-directed IRAs. Starting in 2019 individuals will be able to contribute $6,000 annually, up from $5,500.
If you do not have a self-directed IRA, you should learn more about this valuable tax saving tool. You can start here. Then, to learn more you can purchase Mat Sorensen’s book, “The Self Directed IRA Handbook: An Authoritative Guide For Self Directed Retirement Plan Investors and Their Advisors” at the link below.
The last few posts I have written have been about selling your property. If you are thinking about selling, the time is now. The current real estate market is up to levels we may not see again for years. But you might not make as much as you think when you sell. There are expenses involved in selling. Some pretty substantial expenses.
What are these selling expenses? I have come up with five significant expenses that I think most investors will bear when they sell. These are:
In this post, my goal is to introduce these expenses and some of the basics of each. In later posts I hope to go into much more detail. Some of these expenses, especially those involved with Uncle Sam, are just too complicated to be dealt with in this brief post. I therefore feel it is important to just introduce them now and get into the details later.
These expenses are vital for investors to understand. Otherwise, how can we make a proper and informed decision with regards to selling? I think many uniformed investors believe that their profit will be the sales price less whatever they paid. But with investment properties, it is never that simple.
Most want to get top dollar when they sell something. Getting top dollar often means a bit of spit and polish as they say to make something look its best. Real estate is no different and some of these preparation expenses might involve lawn and landscaping work, a bit of paint, or some other repairs. This expense is however completely under your control. You can decide if and how much you want to prepare. You can sell as is or perhaps $1,000 will net you real gains on the sales price or you can sell “as is.” You get to decide what makes sense for you.
Commissions are fees paid (often to Realtors) for bringing a buyer and seller together. How much this expense is will often depend on your local market conditions and customs. It is another expense that is somewhat under your control. Commissions can be steep, running as much as 6% or more of the sales price. Of course you can negotiate commissions or choose not to use a Realtor at all, but then finding a buyer and selling may prove difficult.
Whenever you sell a property, there will always be attorney’s fees, title fees, inspection fees, recording fees, transfer taxes and a whole host of other fees. Again some of this can be controlled by you and some of it will be dictated by local custom or even state laws. No way around it however, there are always fees associated with selling. And the bigger the real estate deal, the bigger the expense of closing costs.
Hopefully, you will sell you property for more than you paid for it. That means a profit for you. Unfortunately, Uncle Sam wants his cut of your profit and his cut is called capital gains taxes. Capital gains taxes can get complicated quickly. There are differing federal rules based on length of ownership, if you have ever lived in the property and how much income you have. These taxes can be deferred but they cannot be avoided in this lifetime. If you want to cash out at some point, you will have to pay.
Capital gains taxes put a crimp in your pocket and recapture taxes will to. These taxes are the dirty little secret of buy and hold real estate investing. The tax breaks you received by depreciating your properties have to be paid back when you sell. There is no way around them. Even if you did not actually take the depreciation deduction the IRS will assume you did. Recapture taxes will be significant and they can be difficult to calculate. These taxes can be deferred, but if you want to cash out in this lifetime, you are going to have to pay them.
The expenses of selling a property add up very quickly and can take a big bite out of potential profits. These expenses are often not properly expected, calculated or understood by many investors and thus poor decisions are made. Should you never sell because of these expenses? No, I do not think so. But failing to understand them will leave you with an unclear picture and wondering where all of your money went. If future posts, I hope to make things a bit clearer.
In my previous post I discussed the current exuberance found in the real estate market and the broader economy. The rising real estate prices, the lack of inventory and the steady stream of buyers have caused many to wonder if they should buy right now. The answer to that question was yes, as long as the numbers make sense. Of course the flip side of that question is should I sell right now? Again the answer is yes. If you have any desire to sell, now is the time.
Real estate prices are up. In many areas they are back to where they were or have exceeded their levels before the Great Recession of 2008. It is definitely a seller’s market. The anecdotal evidence is everywhere. I have been getting at least two or three random calls a week asking me if I have any interest in selling. Other investors I know literally have people bringing them unsolicited offers, very nice offers I might add. These were things I did not see a few years ago. The money in the economy is flowing right now and it is flowing, at least in part, into real estate.
All of that money flow and low interest rates have in part pushed real estate prices higher and higher. Will prices continue to rise? How long will they do so? No one can really tell us. But, the fact remains that if you want to sell, the time to do so is now.
If you wait and ignore the selling opportunity now being presented, it might be ten years or more before another such opportunity comes around again. Think about it. The last time we saw a real estate frenzy like what is happening today was in 2006-2007. It is now over 10 years later and real estate is finally hot again. Do you want to wait another 10 plus years? If the market was to slide again, the prices that are here today may not be back for 10 years or more.
Selling however can be a very tough choice. Should you give up the cash flow that you worked so hard to get? How much can you expect to gain from selling? What are the tax consequences? What will you live on? What will you do next? On the other hand, why not cash out? You will most likely want to retire at some point. Is now the time? If not, do you want to, or can you, wait another ten years? Only you can answer those questions.
This seller’s market will not last. Interest rates and other forces will eventually cause prices to retreat. Those same forces will also quickly dry up all of the money that is now out there flowing into real estate. I remember the same conditions were around in 2007. Back then I could find all of the money I needed, but there was little to buy. Then bam! Almost overnight it dried up. There were real estate deals everywhere, but very little money to be had. The money needed for you to cash out is here now. You may want to take advantage of it.
There is of course no need to sell. If your properties are cash flowing well, and you are not tired of the business than continue to hold. Good cash flowing properties should stand the test of time and there is no need to put them on the market unless you want to. But, if you are looking to retire, or are looking get out of the real estate business, now is a really good time to think about it.
What are you seeing in your real estate market? Are you thinking about selling right now? Wny or why not? Please share with your comments.
Sitting here in late 2018 the real estate market seems a bit overheated. Prices have been steadily increasing, the supply of properties to purchase seems to have been decreasing and the numbers of people chasing after those properties seem to get more and more frenzied. The exuberance is definitely there. Understanding this the question then becomes is now a good time to buy? Should we wait until this exuberance passes?
I say buy now if you can, but on one condition.
What is that condition? The condition is to buy now only if the numbers make sense. If after looking at a property the numbers make sense even in today’s exuberant market then pull the trigger and make the deal. I just bought a property and the deal should turn out well.
The problem with an exuberated market like ours is that it can become difficult to understand exactly what the numbers should be. The numbers just keep going up, up, up. Rents, it is assumed, will continuously rise and therefore prices will follow. Unfortunately, some of us tend to forget that what goes up must at some point come down. The numbers can become misleading thus tricking us into thinking something is there when it is not.
Those of us who have been around a while have seen it before. We saw it in 2008 when anything that came on the market was bought sight unseen within hours. We heard then that real estate prices always go up, that this time was different, etc, etc. Some folks out there learned a very hard lesson.
In order not to repeat learning that lesson, we landlords need to keep focused on the fundamental thing that drives renal property value. Rents. Always look at a deal by working backwards from the rent. Stay focused on rental income and attuned to what it will likely do in the future. If rents are going to keep rising as they have over the past few years then prices of properties will likely keep rising also.
Rents are affects by many different things. Supply and demand is perhaps the most important factor. And supply and demand is often driven by jobs. If there are increasing numbers of jobs, there will be increasing demand for works to fill those jobs. Those workers will need a place to live and they will drive up demand for rentals. Eventually however, entrepreneurs respond to increased demand and build new units to meet that demand. Those units take time to get on the market but once they do, demand can lessen and push rents down.
The flow of money is another important factor. The money that has been pumped into the system by the Federal Reserve through QE has flooded the market. That money is now drying up and interest rates are on the rise. That means a slowdown is in our future for sure. When? Who knows. But when it happens rents will be impacted.
The best bet today is to be conservative or even perhaps a bit negative. In other words, be cautious. When the downturn comes, jobs will be impacted. That will impact rents and property values as will rising interest rates. Do not bet on the ability to increase rents in the future at this time unless you are in a rapidly expanding market. Do not fudge your numbers and pay too much now thinking you will receive increased income in the future. You may not and timing the market can be very difficult. By being conservative now, you can withstand a bit of a downturn in the market when it comes along.
Remember, the numbers do not lie, but operator error when imputing them can affect your outcome. Try to contain your exuberance. Let the other guy bet on rent and price appreciation right now. Be conservative so you can remain standing when the buying opportunities present themselves. Trust me, they will.
