admin Posted on 7:44 pm

The absolute beauty of real estate investing

There are many investment options out there these days. From cash to Treasury bills, stocks, bonds, gold, emerging markets, art, start-ups, your own business, bad debts, etc. The options are almost limitless, and for each type of investment there are one or two salespeople who will tell you why their chosen investment is the best type of investment. It makes sense that wherever you put your investment dollars, you should be pretty well versed and knowledgeable. You’ve been diligently saving money for something, haven’t you? It would be nice to know that you have some sort of control over the outcome of the money spent in those post-daily grind years.

The sad truth is that most work hard for their money for years, but are too tired to really invest the time and effort to understand their investment options and strategies and simply pawn it off to the portfolio advisor who was able to sell their company. on a plan or the first decent person to walk in the door with an investment strategy. Some really go out of their way to seek a recommendation from a friend or colleague. The real litmus test is, has anyone ever bothered to tell you about an advisor who really blew them away, and I mean someone who is not related to this person or has a financial incentive to bring them on board? . There is a subtle but very important difference between someone who is happy with their advisor and someone who is going to bend your ear at lunch for half an hour about how good their advisor is. The vast majority fall into category one, and probably the vast majority of category ones probably tell themselves they’re happy simply because they don’t want to feel foolish for placing so much trust and their financial future in someone they’re not really excited about. .

Let’s talk about Real Estate. Some of the tremendous advantages of Real Estate over other investment options are as follows.

1) It is a tangible, palpable, tangible, sniffable, deliverable,

2) It is insurable,

3) It is leveraged,

4) It is depreciable,

5) The value can be increased in multiple ways,

6) ROI can be realized through increased capital and cash flow,

7) It is not illegal to buy or sell directly using privileged information,

Here is an example of how you can use all these benefits in one property.

The other day I received a notice about a man who inherited property through probate but had personal money problems. Well, the property wasn’t doing the man any good, because he had no liquidity at the time. He needed cash in a few days and no matter how nice this inherited house was, it was actually a burden on the man, simply because one didn’t solve his problem, two was another thing for him to take care of. This is a bit of what you would call inside information. The general public does not know about this man’s situation, nor will he appear in any newspaper, nor will I share this information with anyone, and it is great news for me, and perfectly legal. As Martha Stewart may object, that’s not how the stock market works.

Now, I did some research and figured the house was worth around $175,000. I called this man and explained that I was a real estate investor and had heard that he recently inherited a property that he may not have any use for and wanted to see if he would discuss selling the property to me. He said yes, and he explained the ins and outs of the property to me. I just asked him a few more questions about why he would sell such a nice house and he came out and he told me about his financial problems and how the property was such a heavy weight on his shoulders. I sympathized with the man and got him to tell me that we buy properties for cash, that we can close very quickly if necessary at a discount. I further explained that we have to be able to sell the house quickly and make a profit for the deal to work for us. He stated that he needed about $75,000 to cure his financial problems and give him a break and that he hoped to sell the house to simply give him a fresh start. I let him know that based on what he had told me about the property, we could offer him $100,000 cash and close as soon as the title was clear and he jumped on it. Now, to be fair, he probably could have said $75,000, which was his number and he would have snapped too, but we’re not in the business of taking advantage of people. No matter what the situation would have been, that would have been my offer, because that is a fair distribution of property for our business.

So just by having good inside information, WE CREATED $75,000 in equity on day one. To top it off, his property was an old house and had three bedrooms and one bathroom. Renovated homes in the area with three bedrooms and two bathrooms, preferably one in the master bedroom, sell for $225,000. So for about $15,000 worth of paint, carpeting, relatively minor updates to the kitchen and bathroom (mainly just reglazing the tiles in a more modern white), and reconfiguring an odd space on the first floor, I was able to turn this property into a new and clean three-bedroom two. bath house which was in demand in the area. With a little vision and $15,000 I was able to create an additional $50,000 in capital, or a $35,000 net positive impact on my bottom line in less than a month. So far we have $110,000 in equity in the property and financially we are all around $115,000 plus tax and insurance costs of a couple thousand dollars.

I’m not done with this one yet. I have a handful of investors who understand the power of real estate and want to get in on the action, but don’t want to get their hands dirty. They will loan me up to 70% of the After Repair Value (“ARV”) of the property, $157,500 ($225,000 x 70%) using any liquid funds available to them or money from their IRA, see IRA Investing chapter . In practice we will only take up to 70% of the value after a property is repaired because it gives everyone a 30% cushion in case there is a shake up in the market or something unforeseen happens, there is still plenty of capital to pull out . get out of the deal and make a profit. Also, I insure the property for the full ARV in case an act of God completely destroys the property so everyone gets their money and profit as promised. Our investors also obtain a registered first mortgage position with the county.

Also, for the privilege of having access to my investors’ funds in the short term and to incentivize them to stay satisfied as passive investors, we pay a good rate of return of 12% simple interest, assuming the investor accepts full repayment of their pending debt. balance once the property is sold or refinanced, usually no more than a couple of years, or 10% if they want monthly payments. I pay a 2% convenience fee so I don’t have to drag out the old checkbook every month and mail a check, and put it in my ledger and quick books, etc. Are my investors happy? You are earning 12% on a tangible asset that is leveraged to a maximum of 70% loan-to-value (“LTV”), your investment and return are catastrophically insured, you are the first lienholder on the property, and the term is relatively In short, no more than a handful of years, plus he knows this is all I do, so as soon as we finish this investment he can move on to the next one. I jokingly say that the worst/best case scenario is that I don’t give you your money back. Instead of 12%, it takes the full equity position of 30%.

But, we’re not done yet. I happen to know that in this market there are people whose credit cards have had their limits lowered, the faltering economy has caused a late payment or two and potentially a relocation and whose credit has gone down ever so slightly. These are the people, if they were born a year early, they would be first time homebuyers, but they just got caught up in the financial crisis and just can’t qualify in the traditional way. The good news is that I am happy to help. These folks are itching to own a home of their own and are scouring the daily newspapers and online classifieds looking for three things: 1) A decent 3 bed 2 bath home, 2) In a good area with 3) an owner who finance. It just so happens that I have exactly that. My ad says: Attractive 3 bed 2 bath home, great neighborhood, $235,000, owner will finance with reasonable down payment. They call me, come see the house, which I have partially decorated with a minimum of a couple of pretty towels in the kitchen and bathroom, some fresh cut flowers staged around the house, a fresh cup of coffee when you come in and Small radio playing some kind of relaxing music. It’s all they wanted.

We set it up as a lease to own, they put a 3% down, which happens to be the 3% they were saving to qualify for an FHA loan, and I set them up on a two year lease (time to put in order their credit so they can buy the property directly from me using conventional financing) and their lease payment is exactly the same as the monthly payment on a 6.5% for 97% loan of $235,000 amortized over 30 years plus tax and insurance or $1,774. In addition, the terms of my agreement with them are as follows, they will take care of any repairs and maintenance on the property for less than $1,000, and upon exercising the option to purchase the property from me in two years, I will credit them with your down payment as well as what your principal reduction would have been if we had actually had a loan vs. a lease. Essentially in every way except title they are proprietary. They will have equity in the property from day one. For me, if they choose not to buy the property, I have their down payment, plus the 6.5% interest that I was effectively charging them over the two-year period. Just for comparison’s sake, I borrowed $120,000 at 12%, which is $14,400 per year. Tenants of my lease option pay me $14,817 per year in effective interest. All property expenses are covered, I can put $400 in the bank every year, and by the way, did you notice I was offering owner financing and was able to raise the price $10,000?

I’m not done yet. As a real estate professional, I am able to deduct all of my expenses associated with this property for tax purposes, newspaper advertisements, vehicle expenses, and best of all, depreciation. Since I still own the property, I can also depreciate the property for more tax savings. Also, while I wait a year, the gain will be taxed at the capital gains vs. ordinary income which is another $20,000 or so that goes into my pocket.

Since I did not cross the 70% ARV threshold on this investment, my return is infinite since I did not invest a single dollar in this property. My investor, unlike the banks, would probably feel cheated if he didn’t take full advantage of his investment to make him as much money as possible. I could have sold the property immediately for $225,000 putting $110,000 in the bank minus tax, but I chose to go the other way and put some servants in the house for an extra $10,000 with no extra effort, plus reap the tax benefits of owning the property for the short term. It’s hard not to really like the benefits of real estate. When you find and work with the right people, the sky is the limit here.

I win big, but it takes a little work. My private investors make big, they make substantial profits with protections that you can’t get in almost any other type of investment. We were able to take advantage of the many benefits of investing in real estate with just one property. This does not even consider the benefits of multi-family housing or commercial properties that are as many as those listed above.

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