SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Leverage

Why I Became A Real Estate Investor

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I have always rented: rooms, apartments, town houses, single family homes—the works.   My parents have always rented too.   They worked hard to provide for me, but I wish they had worked smarter.

Working smart is having assets that work for you.

Unless you have revenue generating assets, your income will always depend on the hours you punch on a time clock.   Building wealth and financial stability is about diversifying your revenue streams.   Diversification will provide you with an additional level of stability in the event that you’re laid off or suffer from a severe medical condition.

I’m young but I’m all about preparation.   There are many reasons why investing in real estate can be advantageous.   Here are 5 reasons why I became a real estate investor.

1. It is not rocket science.
Properties appreciate alongside inflation.   The longer you own an investment, the more it is worth.   As a notoriously indecisive person, I enjoy the options that appreciation provides.   I can sell it for a profit down the road, or I can refinance and leverage the equity to continue investing.

2. I learn valuable skills.
Unlike undergraduate school where I spent thousands of dollars to learn things like existentialism, the skills I have learned during my time in real estate are functional.   As long as people live in houses, there will always be a demand for carpenters, plumbers, painters, etc.   If all else fails, I could make a living as a handy man—not to mention the money I save by doing repairs on my own.

3. I can increase the value of my investment.
Unlike stocks or bonds, a real estate investment is something that you can directly and immediately affect.Sweat equity can go a long way, increasing the property’s value and increasing its rent revenue potential.   I enjoy the work too; so, it’s a win/win!

4. Cash flow is king.
The revenues generated from my rentals cover my mortgage—in addition to padding my pockets.   Someone else is paying for my retirement!   I’m able to save at a higher level than before too, which affords me some of life’s luxuries, as well as the ability to continue investing.

5. I can be proud.
The most rewarding part of being a real estate investor is the difference that you make in the community.   It’s incredibly satisfying to see an abandoned property return to its former glory. I want to be a catalyst for systemic change, and real estate can afford me the opportunity.   I also enjoy being a fair landlord to deserving tenants. Too many companies take advantage of tenants through crafty lease language—or by neglecting their duty to maintain the property.   I know because I have been there.

I’m proud to be an investor.

So what are your reasons?

 

Presenting Yourself Financially

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One of the great things about real estate investing is that you get to leverage OPM, that is other people’s money.  Rarely do you use your own funds to purchase investment property (although if you can, that is a great way to go), rather you use the bank’s or some other investors funds to purchase your investment properties.  No matter where you are getting the funds, a smarter real estate investor learns how to present themselves financially.

Presenting yourself financially begins with you.  You have to show any investor, be it a local bank or a wealthy friend, that you are a good risk.  You need to demonstrate that if they choose to invest with you the chances of the investor loosing their money are very slim.  One of the best ways to do that is to put together a packet or “bank book” that explains who you are, what you do and how you plan to pay the money back.  Such a book makes you look professional and on top of your game.

Your bank book should first contain information on who you are.  Include resumes of yourself and any business partners.  Draft a short overview explaining how you got into the real estate business, how long you have been doing it and your goals for the future (you have thought about your goals right?).  Include any articles or blog posts you may have written that are relevant.  Perhaps you were interviewed by the local paper about your investments or about some charity work you have done, include that as well.  You want your investor to see that you are a solid and ethical person and thus worth the risk.

Next you need to include all of your financial information.  At least two years of tax returns will be required although more is better.  You should also prepare and sign a personal financial statement that outlines all of your assets and liabilities.  I also include information pages on the properties I own and manage that describe the workings of those properties, debts, expenses, cash flow, etc. in detail.  Include pictures.  If you rehab properties, show some before and after shots.  Remember a good picture is worth a thousand words.

I also like to add information about my team.  I list the names and telephone numbers of my attorneys, accountant and the various contractors I use.  I let my investor know they are free to contact anyone on my team with questions (let your team know first).  This information helps show folks that I seek competent advice when necessary and that I have a competent team to back me up.

Let me close with a tip.  In years past I would actually print out all of this material and put it together in a book form, over 100 pages!  No more.  Today it is all scanned and placed on a jump drive.  This cuts down my paper expense and helps my lender do their job because they are just going to scan everything into electronic format anyway.  Make their job easier and do it for them, they will like you for that and it may just give you an edge.

To help you get started, you can find the table of contents to my bankers book (or list of files for my jump drive) on my Smarter Resources Page.  Until next time, work smarter not harder.

5 Forecasts For 2012

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So I am going out on a limb here with some forecasts for the New Year.  I say forecasts rather than predictions because it is impossible to predict the future, but I can speculate a little based upon current conditions and a little base knowledge.  Forecasting 2012 is much like forecasting the weather.  I know for example that here in Memphis in the spring cold and warm air masses will begin to interact with each other on a more frequent basis.  Sometimes this interaction will produce tornadoes.  I cannot say however where those tornadoes will touch down or how strong they will be.  There are just too many variables.

The same goes for 2012.  I know based upon what is happening now, such as Federal Reserve money printing or government market manipulations that certain things are very likely to happen.  I just can’t say exactly when or how significant the impact will be.  For that we will just have to wait and see.

OK here goes:

1.  Commodities such as oil, copper, gold, building materials, etc will continue to increase in price.  These increases are the result of money printing by the Federal Reserve and soon also to be by the European Central Bank and Bank of China.  Newly printed money always hits the capital sectors of the economy first before it makes its way down to consumer goods.  This is why commodities like copper have gotten so expensive that people will now take grave risks to steal it.  I do not see any sign of the money printing slowing so expect commodities to continue to increase in price.

Why should you care?  Higher oil prices are like a hidden tax, especially on lower income folks.  They will either have to buy gasoline to get to work or pay you rent, but will not be able to do both.  Higher prices also make new home construction much more expensive, slowing it down in all but the priciest parts of town.  Eventually the new money will make it to the consumer sector and food prices will begin to rise.  That’s when things will get fun.

2.  Interest rates will begin to creep up.  The United States borrows $20,000 every second!  Well guess what, with loose spending like that no one wants to buy our debt anymore.  In fact some like the Chinese have been selling it off.  So as demand drops we have to offer higher and higher interest rates to unload our debt.  Unless of course the Federal Reserve steps in to buy the debt no one else wants by printing money.  Then rates may stay low but see Number 1 above.

Why should you care?  Interest rates affect real estate prices.  Higher interest rates will put more downward pressure on prices.

3.  The Chinese economy is in trouble.  I expect to see some real turmoil in the Chinese economy in the coming year.  China has made remarkable strides in the past few decades, but it is still a communist, centrally planned economy in many ways.  Thus the number of malinvestments in China is staggering.  This malinvestment of capital and resources is going to have to be corrected and that correction is going to be painful.

Why should you care?  China makes all our stuff now, where will we get it all?  If China takes a dive, who will buy all that debt?  See number 2 above.

4.  Real estate prices will not recover much.  There are still a lot of malinvestments (bad loans, useless condos) on the books and in the foreclosure pipeline in this country.  We have not even begun to reach the bottom of the foreclosure crisis yet as there are thousands of people underwater and not even paying their notes.

Why should you care?  These foreclosures and low prices translate into numerous deals for us investors.  It looks like the deals will keep on coming.  I hope you can get some sooner rather than later though (see number 2 above).  And be sure not to bet on price appreciation, unless you are a farmer.  Bet on positive cash flow to stay strong.

5.  Lending to real estate investors will remain flat.  Banks made a lot of bad decisions (malinvestments) in the past decade and a lot of that junk is still on their books.  They are either so backed up with foreclosures, or do not want to take the write downs, or simply no one wants to buy their bad loans and inventory.  In fact, I bet we will see bank closures and forced fire sales to other banks in the coming months.  Bottom line, the bankers are scared of real estate, especially investment real estate and will be for some time.

Why should you care?  One of the best things about real estate is leverage or using other people’s money (OPM).  Traditionally banks were the place to go to get OPM.  Those days are over for now.  Does that mean you quit as an investor?  No!  This is the best time to be buying real estate (you read number 4 above right?)  You must adjust.  Find private lenders and offer then a nice interest rate (especially now while rates are low!  See number 2 above).  Or find a wholesaler who has private financing in place.  They are out there.

So there you have it (wow that was a longer post than I thought it would be).  My five forecasts for 2012.  It is not all doom and gloom.  In fact it is a great time to be a real estate investor.  But one must watch the trends, study the data, make the forecasts and adjust accordingly.

Till next time, work smarter not harder and Happy New Year!

 

 

Podcast – Why Invest in Real Estate

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Check out my latest podcast where I along with Jo Garner and Richard Scarbrough discuss why you should invest in real estate.  Originally aired on AM 600 WREC on 12/3/2011.

5 Financial Reasons to Invest in Real Estate

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Fourplex apartments can be a great cashflow generator.


You have probably heard that real estate is a good investment.  You may even know some people who are active investors.  You may even be thinking yourself that you should get into real estate investing (you should be).  But have you ever thought about why real estate is such a good investment.  My friends and fellow investors Richard Scarbrough, Jo Garner and I briefly went over the reasons why on the radio this past Saturday.  Since we were constrained by time, I thought I would share some more detail.  Be sure and read through for a bonus at the end of this post.

 

There are financial and non-financial reasons why real estate is a good investment. I’ll go through the top 5 financial reasons today and save the non-financial reasons for a future post.

  1. Cahsflow is KING in the real estate investing world.  Cashflow is income from the property such as rent, less expenses including principal and interest payments, insurance, property taxes, 10% repair credit and 10% vacancy credit.*  For example, if monthly rental income is $1,000 and your monthly expenses total $850, that leaves a monthly cash flow of $150 or profit per month. Cashflow is King!  Are you beginning to understand the beauty of real estate?  All of your expenses are paid by your tenants.
  2. Leverage – Leverage simply means having the ability to use other people’s money (OPM).  Think about how you purchase real estate.  You purchase it with a loan or mortgage.  That is using OPM.  You can even purchase real estate with no money out of your pocket, entirely using OPM!  Even better, your first purchases will often utilize a low, fixed interest rate payable over thirty years.  What other investments allow you to do this?  What if you wanted to buy some gold coins (you should be doing that as well, but that is another post)?  Would a bank lend you the money to buy gold?  How about stocks or bonds?  The answer in general is no.  You would have to come up with 100% of the purchase price to buy any of those other investments.  Leverage is a huge advantage for real estate investors.
  3. Monthly Mortgage Paydown – Owning real estate also allows you to build wealth every month.  Every time you make your mortgage payment, some of that payment goes to interest and some goes to principal.  The portion that goes to principal is just like putting money in the bank.  Every month you owe a little bit less on the property and have little more equity on your balance sheet.  Plus, remember who is paying it down for you, your tenants!
  4. Federal Tax Savings – We all know that Uncle Sam takes a chunk with income taxes while allowing fewer and fewer deductions.  Real estate investing is one of the few methods that can actually bring your earned income down to zero!  Yes, zero so you pay little or no federal income taxes.  Now, I’m not doing anything illegal and do not suggest you do either.  However I do take every legal deduction available and there are many.  One of the best is something called depreciation, but that’s another post for another day.  Want to learn more about the tax benefits of real estate investing?  I suggest reading this (Nolo’s Every Landlord’s Tax deduction Guide) book.  (Please note that I am not a CPA or professional tax advisor.  Please consult an appropriate expert before completing any investment decision.)
  5. Appreciation and Equity – You may not think that this applies today with the recent real estate boom and bust.  But part of the art of being a real estate investor is finding the good deals, deals where equity and appreciation are still available.  They are out there.   Find one and get instant equity when you close.  Plus, we are pulling out of this recession and while real estate still has to hit bottom in some areas, it will eventually start to appreciate slowly once again.

 

There you have them, the top five financial reasons why you should invest in real estate.  And here is the bonus I promised.  With any other investment vehicle, such as stock, bonds or precious metals, you might get one, maybe two of these financial benefits.  Owning real estate gives you all five.  There is no other investment vehicle that gives you all of these benefits.

 

I’ll blog again soon about the non-financial reasons to invest in real estate.  Until then, work smarter, not harder!

 

* As a general rule of thumb, always allow for a vacancy credit and a repair credit equal to 10% of the gross monthly income.  If a property’s income is $1,000 for example, then the vacancy and repair credits would be $100 each.