The house on Carla Vista Drive had never been remodeled.  Nor did the original owner elect to pay for any upgrades when the home was first purchased.  Built in 1992, it had no appeal to a retail buyer.  From the peach-colored mini aluminum blinds, to the blue countertops, to the white-washed kitchen cabinets, this house had it all – all awful that is.

My wife and I bought it anyway.  It was 2004 and my real estate investment business was firing on all cylinders.  About $50,000 and 6 months later we transformed this early-90’s eyesore into our dream home.

Soon my youngest daughter came along.  We brought her directly from the hospital to our newly renovated home.  She took her first step in this house.  Both of my daughters learned to swing on the backyard play set and swim in the pool.  On the weekends we’d walk over to the nearby park for picnics.

Then in 2007 property values plummeted.

By 2008, we were underwater on the mortgage by almost $100,000.  Our lender had no interest in a loan modification and a principal balance reduction was out of the question.  So we were left with a difficult decision – throw good money after bad to stay in a home our girls had grown up in, or walk away.

We chose the latter.  And now four years later I’m convinced it was an extremely wise business decision.

It didn’t feel that way at first.  The adjustment was difficult.  We had to rent a much smaller home further out of town.  Then we had to change schools.  There was no backyard pool or park nearby.  But, eventually we were able to buy another house again – a similar home to our last, for half the price and payment.  Ironically, it was a short sale and the seller was $150,000 underwater.  We found out that this family was doing exactly what we did four years ago.

Yesterday, the USA Today reported that the federal government is “very close” to a settlement with mortgage servicers that could help a million homeowners by reducing what they owe on their mortgages.  The settlement may also enable more borrowers to refinance into lower-interest-rate loans, even if they owe more on their homes than they’re worth, and to set more stringent mortgage servicing standards for the entire industry.

This is not the answer.  It’s time our federal government let underwater homeowners drown.  Nature must take its course.  In most states, lenders have little recourse if a homeowner strategically defaults.  The negative stigma attached to defaulting on a promise to pay a mortgage isn’t so negative anymore.  Plain and simple, it makes smart financial sense to walk away.  Once market values reset, on their own without government intervention, the real recovery can begin.

Yes, it’s painful.  But I’m living proof that drowning on an underwater mortgage will not kill you – it may actually make you stronger.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Time to Let Underwater Homeowners Drown

As an investor who holds a full-time job, I feel compelled to share the reason I have been successful over the last 10 years.

It all boils down to one word: “Sacrifice.”

I believe that one word holds the key to success for investors who work full-time and chose to be active real estate investors.

Let’s define Sacrifice as the simple act of giving up something for the sake of doing something else.  For example, I give up eating desserts, which I love, because I want to lose some weight.  I stop doing something I like to do because I have a more important goal of losing weight.  With that context, let’s look at all the things a Real Estate Investor working full-time will have to sacrifice, at least on occasion, in order to be successful long term.

Time:

Having a full-time job does not give you a lot of flexibility to learn, research, and build a portfolio of rental homes.  You will undoubtedly have to sacrifice a lot of time to your new business venture.  You will need to wake up early, stay up late, leverage your weekends, and even give up your lunch break on many occasions to be successful in this business.

One reality in life is we are all given the same amount of time in the day.  However, people choose to leverage their time in many different ways.  I suggest investors with full time jobs go in with their eyes wide open, as they are going to sacrifice a lot of time to this business.

Get ready for it, get comfortable, and make sure you are getting a great return for your sacrifice!

Money:

Contrary to popular belief, it does take some money to make this business work.  Even if you are a buy-and-hold investor like me, you will need some cash for repairs, maintenance and unexpected surprises.  Never run your business so tight that one surprise causes you to miss mortgage payments.

In addition to normal working capital, many of you will be shrinking your savings or investment portfolios by placing sizable down payments.  I have seen this simple act cause investors or people close to the investor to freak out as their liquidity dries up.  The simple fact is that real estate is not as liquid as cash or stocks, so if you need that security, don’t make the sacrifice and stay out of real estate.

You need to be comfortable with sacrificing money for down payments and working capital to grow/maintain your portfolio.

Toys and Extras:

One of the great truths I have learned about real estate investing is that as you start out and build your portfolio, you will need to sacrifice extras in life at the beginning.   You simply don’t have an option to turn extra cash into anything other than more real estate.  Don’t ever stop the momentum of building your portfolio.

After 10 years, I still turn 100% of my available cash into more real estate.  This is especially true given the depressed prices in the current market.

You need to get 100% from your significant other before you start.  You might be willing to sacrifice, but are they willing to sacrifice to the same level?  You can’t sacrifice alone, as you could be shocked to learn your sacrifice has been turned into some other expense, commitment or activity.

Sacrifice can be fun if you are prepared and see the short term cost as the price of doing business in the beginning.

Good Investing

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Sacrifice – Key to Successful Investing while Holding a Full-Time Job

First and foremost… Happy New Year!  I hope that 2012 will be one of great prosperity for you and your family.

As we get started in the brand new year, there are very few things that we can count on.  Of those things, the most prominent is that we will continue to see changes in the real estate market as it struggles to reach some level of equilibrium.  And one thing that we should have learned over these past 5 years, is that the greater the swings in our market, the greater the opportunities for profit. 

Wouldn’t you agree? 

Well, you would if have developed the needed skills to adapt to the ups and downs and every new turn presented to our businesses almost weekly.

Of course, if you have been struggling to find your profits these past several years, perhaps you have found yourself asking. . .

WHO MOVED MY CHEESE?

In fact, if you are struggling because you are hanging on to old notions or approaches then you need to read the book titled, Who Moved My Cheese.  Spencer Johnson was right on when he wrote this book in 1998.  The premise as provided by Amazon is this…

“Change can be a blessing or a curse, depending on your perspective. The message of Who Moved My Cheese? is that all can come to see it as a blessing, if they understand the nature of cheese and the role it plays in their lives. Who Moved My Cheese? is a parable that takes place in a maze. Four beings live in that maze: Sniff and Scurry are mice–nonanalytical and nonjudgmental, they just want cheese and are willing to do whatever it takes to get it. Hem and Haw are “littlepeople,” mouse-size humans who have an entirely different relationship with cheese. It’s not just sustenance to them; it’s their self-image. Their lives and belief systems are built around the cheese they’ve found. Most of us reading the story will see the cheese as something related to our livelihoods–our jobs, our career paths, the industries we work in–although it can stand for anything, from health to relationships. The point of the story is that we have to be alert to changes in the cheese, and be prepared to go running off in search of new sources of cheese when the cheese we have runs out.”

Are you still with me?  Great!

Since you have gotten this far I am sure, as a real estate investor, you have experienced your cheese being moved… moved right out from underneath you.  One minute you are literally fat, dumb and happy… and the next minute your real estate business and by extension your entire life is turned upside down. 

If you were active as an investor during the run-up, I am sure you knew investors who thought they were geniuses, and then the floor fell out of the market and they took a beating.  And in the words of Spencer Johnson, many of these investors, and maybe even you, found yourself asking: Who Moved My Cheese?

What about those of us who thrived during the run-up, survived the downturn, and are profiting in this ever changing market.  Why have we survived?  How have we managed to go from “we could do nothing wrong” to “almost any move could kill us” to “finding consistent profits” and SURVIVING?

Like many of us who have found themselves in the same situation and survived… I think the short answer is that we adapted. 

We adapted to the fact that our cheese was moved and has not stopped moving since late 2005, and that for us to survive and thrive we needed to perfect our ability to adapt.

Take for instance a recent situation where a major lender in our market decided to suspend all investor financing – an action directed by banking regulators.  This local bank was a mainstay in the investor community, so much so that perhaps their success caught up with them.  One day everything was fine and the next this bank moved the cheese in a big way for many investors in our market — and virtually overnight, investors were scrambling, many unsuccessfully, to find funds.

What would you do in this situation?  How would you respond if perhaps your only source of cheese was moved.  Would you act like Hem and Haw, or would you react like Sniff and Scurry?

I can tell you what successful investors would do. They would be turning over every rock seeking out lenders who would support their business plan, and if they were really smart, they would create relationships with several lenders so that if anyone of them moved the cheese, as they most certainly will, it would be of no consequence.

The bottom line is this: those investors that survive and thrive; those investors who know that everyday is going to present another challenge to be overcome; those investors who wake up every morning and welcome the challenges that come their way; those investors willing to recognize the changes around them and quickly adapt; are the investors who are going to survive and succeed, regardless of what is happening with the cheese!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Real Estate Investors: Who Moved Your Cheese?

Many investors in recent months have noticed a decline in REO and HUD inventory in their markets. While some may speculate that we are finally working through the majority of the foreclosure casualties from the real estate crash, many analysts believe the lack of foreclosures on the market has more to do with government intervention. Whatever the case, an investor who has been consistently buying distressed properties may suddenly find themselves looking harder for properties and finding less.

With fewer distressed properties hitting the open market, competition for these properties has begun to heat up.  In my market, I’ve seen prices of properties in the under 100K range creeping upwards as a result of this dynamic. Interestingly, an overall market may still experience declines in real estate values, but the lower price point properties may actually be on the increase.  Since most investment properties fall into the lower price ranges, it’s not uncommon for investors to see prices of potential investment properties increasing  even while the overall market is decreasing or holding steady.

Understanding what prices are doing is key for any investor.  It can be very tempting to set goals based on previous years and create a buying pace that may be difficult to maintain should your market change. I’ve seen investors who were so determined to buy as many houses as they did last year, that they end up compromising and buying houses for more than they should have. As an investor myself, I understand the expectation you can set on yourself to outpace previous years and always grow in volume from one year to the next. However, if the market changes from one year to the next, it’s important that you understand the changes and make necessary adjustments to your strategy and expectations.

The last thing an investor wants to do is buy investment property for the sake of buying property . . . rather than truly waiting for the properties that make financial sense.  If you find that good investment properties in your market are harder to come by, perhaps that should be an indicator that this period of time may be associated with less (and smarter) investing.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Don’t Compromise Your Real Estate Strategy for the Sake of Buying

Merry Christmas. By the time you’re reading this you may have already opened your presents. Hopefully, in addition to all of the stuff you don’t need (like iPods and TV’s) you got some Christmas presents that can increase your income in 2012.

I sure did. I got several books and a marketing course which I had been wanting for a long time. I realize you may be thinking that books and a marketing course for Christmas sounds boring, but not to me. Because I love to learn and because I know that just one nugget of information can add thousands upon thousands of dollars to my income next year.

After all, unless you’re always a student of the real estate investing game, how are you going to improve and get better each year? You’re not. So if by chance, you did not get any educational material this year, let me make a few suggestions of what you should buy with all that money you’re going to have after you return the sweater and tie you don’t want.

First, I’m going to give you a list of books.

If you have not read these books, multiple times, then you’re lacking some very important knowledge. Start with The Millionaire Real Estate Investor by Gary Keller. Also, get Buy and Hold: 7 Steps to a Real Estate Fortune by David Schumacher. Get Building Wealth One House at a Time by John Schaub and get Landlording on Autopilot by Mike Butler.

If you get those four books you’ll be well on your way to becoming more successful this year. Of course, after you read them you have to implement what you learned and not simply put them down like most people do. In fact, I never read a book without a pen and legal pad in my hand and I write down every idea I plan to implement on the legal pad along with the page I found it in the book.

Once you’re done reading these books…

Then you need to go invest in some marketing materials. The marketing course I got for Christmas was by a man named Gary Halbert who is now deceased. He’s a marketing legend who helped market several different types of businesses including real estate.

The last thing you need to do is set aside some time each day to read your books and to read your marketing materials. Personally, I read 20 pages of educational material every single day, 6 days per week.

I try and do it first thing in the morning, but you figure out what works for you. However, once you choose a time, stick to it and make sure that every single day you are learning something new that can make your business and life more profitable.

Photo: Joe Buckingham

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

What You Hopefully Opened on Christmas

I coined that incredibly original phrase about this time last year in a post on my own site. The post duly noted that the convergence of three factors, crucial to long term real estate investing. Interest rates at historically low levels, price/rent ratios mimicking 1958 textbooks, and blue ribbon locations sporting smallish newly built income properties, have become bosom buddies since around early 2010. That’s two years of investing in the only perfect storm I’ve ever witnessed first hand in my career, which began in 1969.

I strongly believe there won’t be another in my lifetime.

Those having done this as long as I, realize how rare this really is. They remember the recession of 1981, but not fondly. You think this one’s been destructive? It certainly has, but it doesn’t pack the same sorta ammo that one did. Try nearly 15% inflation, 20%+ prime rate, and an FHA rate of 16.5%. That wasn’t a perfect storm. It felt like it was an earthquake, tornado, and tsunami holding hands while running through the country. Add all the usual downsides to a recession and you can begin to realize the difference in what we’re mired in today.

I’m not pointing this out to imply a parade of celebration is in order. Far from it. But having lived through the five or so recessions before this, and this current downturn, I’ll take this one — when lookin’ through the real estate investment telescope. It’s not even close, people.

Real Estate Investor Retirement Recovery Window

It’s my belief we’re finishing the second year of this perfect storm. I’m fairly certain, though not anywhere near SlamDunk sure, that 2012 will also be part of this window. Beyond that is anyone’s guess. It depends upon WAY too many factors, most of which are political in nature, not to mention about other continents’ economies and politics. It’s hard to read a cracked crystal ball, the condition of mine for a few decades now.

I used the word recovery cuz I’ve found real estate investors fall into a very few categories. There’s the short term crowd. They think they’ve died ‘n gone to Heaven, which is true to a certain extent. It’s also the reason most of ‘em, sadly, will realize long after the horses are outa the barn, that they missed the long term window of real estate investing. Sure, they’ll have better homes for their families, and shiny cars and such. But they won’t have invested long term, at least the super-majority of them. They’ll pretty much miss out.

Then there’s the gotta buy local crew. If they’re from most parts of Texas and a few other select markets, it won’t matter much. Since most aren’t though, they’ll sentence themselves to below average to mediocre retirements. Seems being able to drive by their properties was more important than a superior retirement in the decision making process. I’m being a tad sarcastic about that, but since we’re in the second freakin’ decade of the 21st century, you’d think they’d adjust. That sounds harsh, I know. But if they don’t snap out of the love affair with their crummy local market, they’ll learn what it’s like to work into their 70′s. It’s almost epidemic in San Diego.

The group that may be hit the hardest are those insisting on combining some of the no-down formulas in the hardest hit markets. Ask investors in Vegas and many parts of Florida how that’s been workin’ out for ‘em lately. I have, over and over, and it’s always sad. Meanwhile, those who told them it was the thing to do are long gone. Their retirements are now not much better than a pipe dream. Not only will the so-called income stream not be there, but many have already lost the properties along with all their hard earned investment capital. It’s this group who I suspect will form a new demographic — former homeowners/investors renting small homes/condos and workin’ ’till they just can’t any more. Beyond sad.

Those who realized how relatively easy it is now to buy investment property hundreds if not thousands of miles from home, are the group who will reap the retirement benefits. I call them the open-eyed crowd. Whether they used cash on hand, or traded the equity from local market investments, they’ve capitalized on the existence of this perfect storm. They see that it literally is a Real Estate Investor Retirement Recovery Window. They also realize it’s probably gonna close sooner rather than later.

Meanwhile, this last group, the ones with their eyes wide open, are tradin’ equities into, or buying the perfect storm type of income properties. They’re lockin’ in super low interest rates, while getting historically strong cash on cash returns. All this and most of ‘em are only puttin’ down 20-30%. If anyone thinks this is gonna be the new norm, they’re sadly mistaken.

It’s called a recovery window for a reason. Just as the window opened, it’ll close. Once that happens, there’ll be two groups left. Those who loaded their real estate investment portfolio up with perfect storm type properties — and those who wish they had. Your 401 ain’t gonna cut it. Social Security? This isn’t a standup comedy routine. Your retirement has a chance now. The window is open. Are you in, or are you out?

Birthdays are gonna keep comin’ and goin’ regardless of your decision. Tick tock.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

The Real Estate Investor Retirement Recovery Window – Two Years Old

Going shopping for Christmas presents is one of my least favorite activities. It’s right up there with going to the dentist and going to the DMV. That’s why I try and do as little of it as possible and that’s why I have a virtual assistant to do these types of tasks which I can’t stand.

And being that Christmas is upon us it is time for you to start thinking of getting something for your tenants or telling your virtual assistant to get something for them like I do.

What Should you get your Tenants for the Holidays?

At the very least, get them a Christmas card. Let them know you’re thinking about them. You don’t want to be the landlord who never, ever contacts his tenants. This sends a bad message and the tenants will think they can get away with more and that you don’t actually care about the property. This causes the tenants to treat the property poorly and to pay rent whenever they fill like it.

If you want to be a big spender I would get your tenants a card and a box of chocolates. This is what I usually have my assistant do. I can’t remember the chocolates but it’s some fancy-type designer chocolates. I don’t mind that it costs a little more because my tenants are paying me thousands of dollars a year and paying down my mortgages for me.
If you want to go all out, then get them a $50 gift card to a store or a restaurant. I do this with tenants that have been with me for multiple years. The tenants who recently moved in with me get the chocolates.

Of course, Christmas isn’t the only time to send a gift to your tenants. You should also send them a gift on their birthday. All of us love it when people remember our birthday’s, so don’t forget to send a handwritten card and gift when the time comes around; And make sure the card is handwritten. Don’t be lazy and order something online — Yes, I do personally handwrite my cards. That’s one the few things my assistant does not do.

Another time when you should send your tenant a gift is when they renew their lease. I will often give them a gas card worth $100 or more or give them a gift card worth several hundred dollars to a store such as like Best Buy.

It’s worth it for me to spend a couple hundred bucks to keep a good tenant, versus having a vacant house for two months that will cost me a few thousand dollars and waste my time trying to locate a new tenant.

In fact, if you haven’t done so yet, I would set up a 2012 calendar that lists all of the dates you should be getting your tenants something such as birthday’s and lease renewals. This small amount of planning will help you increase tenant retention and put more money in your pocket in the long run.

Just remember, after you make that calendar don’t forget to start ordering your Christmas gifts for your tenants.

Photo: Raj Boora

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

What to Get Your Tenants for the Holidays

Real Estate Professionals are in the Business of Serving – Not Selling

If you are in the real estate business, even as an investor, take a moment to consider what you really do.  Many come to the conclusion that they are selling real estate or real estate services such as providing property for tenants.  Many look at real estate as a way to make a living or earn a return on investment and over-look a key element to any successful business.  If you are not providing great service, your  business is limited and the chances of reaching your true potential are very slim.  Now I know many readers are rolling their eyes wondering how customer service ties into rentals or property flipping.  In some cases I’m sure there are agents reading this article convinced it has nothing to do with them.  I challenge you to not be so dismissive of customer service as nothing more than a catch phrase and really good marketing tool.  Spend a few minutes reading and examine your business for missing opportunities to blow away your competition and help your “customers” rave about your service and company.

Who is the “Customer”?

One of the biggest mistakes made in business happens when defining who the customer is as it relates to customer service.  In my business, we operate a Turn-Key company and many would assume that we sell real estate to investors.  So the investor must be the “customer”.  While that assumption is correct, we also have many other “customers” as well and we are not selling any real estate to them.  Everyone we come in contact with is a customer and the same goes for your business.  Consider these other relationships in the real estate business:

• Contractors – Contractors are an essential part of most real estate businesses.  For an investor or a company providing investment opportunities, the relationship you have with contractors is vital for your success.  Contractors control big pieces of the budget for investors from the actual work done to the time it takes for the work to be completed.  Often they are tasked not only with the actual renovation or work on a property, but they are also tasked with keeping a job moving toward completion in a timely manner.  While it is vital to keep the proper perspective and make sure contractors do not forget who pays the bill, those bills can be reduced and completed faster by a company that knows they are valued.  Treat contractors like they are part of the TEAM and help them understand the long term plan for everyone winning.  Show gratitude and thanks for a job well done and they may very well play a huge role in reducing costs and increasing profits on future deals.  A great way to improve that relationship is to pay contractors on time – EVERY time!  A great plan would be to pay contracts every Friday on invoices turned in on Wednesday.  The effort to insure they are paid consistent can absolutely be used to leverage lower costs.

Contractors are also a great source of leads!  Not just property opportunities, but investor buyers as well.  A great relationship with a contractor can lead to savings and profits in multiple areas!

• Tenants – I get a kick out of reading some of the advice columns I have seen on managing units because they are almost always written from a perspective of how to avoid the problems, the headaches, the swindlers and the professional tenants.  What is almost universally missing is advice on how to serve your tenants.  Actually viewing them as a customer who is paying you to provide them housing instead of simply a tenant who owes you money each month!  Most investors and management companies get stuck when trying to come up with ways to serve tenants while still keeping the proper relationship.  In reality, there are many ways to provide customer service to tenants.  First and foremost would be education.  Financial literacy is a great thing to offer tenants and demonstrates your willingness to improve their lives beyond housing.  A more financially secure tenant is always a better tenant and financial literacy programs can be offered for little to no cost.  Another idea is to offer classes on a couple of Saturday mornings each month on topics like changing air filters.  Its a free demonstration and the tenant takes an air filter home to change it.  Because you offer such great service to your contractors, you should be able to easily get an heating & air company to spend their morning giving the demonstrations at no cost!

I have to confess that in our business which is owned by my family, none of them let me go near the property management company.  I have a habit of being a little too nice – they call me the softy!  Having thought it was a good idea to send flowers when a tenant closes and give out thanksgiving turkeys and other gifts almost got me banned for life from the property management company.  I had to re-think how we can serve our tenants so that it fit in with providing service but also fulfilling the mission of keeping properties efficiently operating and producing cash flow for investors.

• Clients – This is the easy one right.  So how come so many professionals get customer service wrong?  In the real estate business, a client is any buyer who purchases properties from you or hires you to provide services.  Customer service is more than simply being available to return phone calls, sending nick-knack junk with your name on it twice a year and a thank you card during the holidays.  An investor recently commented that we had won his business because the young lady who answered his original call, actually called him back at the exact time she said she would and emailed him information that he requested in a timely manner.  Yes, that is how low the bar has been set for customer service!  This is an opportunity to wow clients with anniversary cards, birthday cards, unique thank you baskets, gift cards to Starbucks simply “because it’s cold outside”, monthly updates or even a monthly phone with the simple question of “how are we doing?”.  It is often said that the easiest sale to make is to an existing client.  The second easiest sale to make is to a referral.  Keeping this group of people happy and touching them in as many unique ways as possible is one of the best business builders around.

In today’s busy world there are opportunities around us everyday to wow those that we work with.  Providing great customer service is not only a way to set yourself apart form competition; not only a way to build a close bond with a client; but it is also a way to create job security with clients, customers, partners and even tenants that tell everyone within ear shot about your company.  If they believe that you are the best at what you do and you prove it by providing great service…well that is the best job security I can think of!

Photo: Steven Depolo

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

‘Customer Service’ is Essential for Real Estate Success

Let’s just get down to brass tacks. Your 401K/IRA is virtually guaranteed to let you down when it comes to the income on which you’re relying for retirement. You’ve been lead down the garden path. Ironically, these so-called ‘qualified plans’ are in reality very well designed future streams of income — for the Treasury Department — not you. This is especially true, often painfully so, for Boomers. It’s a classic bait ‘n switch play.

The taxpayer, that’s us, is attracted to the bait of some cheap, but helpful (not much) tax savings — now. Let’s say you’re contributing $10,000 a year to your company’s 401k qualified plan. You’re pleased with the 20-30% or so in tax savings each year. (Depending upon your marginal rate and the state in which you reside.) We’ll say it’s the top of the range, 30%, or $3,000. This means from age 35 when you began, ’til 65 when you retired to make it work. During that 30 year period you saved (rounded up), $100,000 in taxes. If you made about 7.33% average annual return, you won’t, but we’ll say you did, your balance at 65 would be $1 million. Again you won’t do that, but we’ll say you did.

For as long as I can remember, Wall Street types have been tellin’ us to expect to live on a yield of around 4% of what we have at retirement. One wonders what they’re tellin’ those who retired recently? They’re not makin’ 4%. In fact, given that the yield on the 30 year bond is now at 3.04%, there is much disappointment out there. Imagine spending 30 years diligently putting in your $10,000, for the truly enviable privilege of making just over $30,000 a year upon retiring — before taxes that is. Oops. Wasn’t that $100,000 in tax savings over the last 30 years worth it?! Gimme a break.

Before you begin thinkin’ you’re the exception, and you may be, here’s what the average 58 year old American man has in his 401k: Less than $70,000. MegaOops.

But what if . . .

I speak to many in this situation, week in and week out. Let’s say they’re mid-40s and have been contributing to a 401k(s) since their mid-late 20s. So far, they’ve amassed around $385,000 in total 401k funds. If they were to take half out this year and half next month, the net after taxes/penalty(s) would probably be in the neighborhood of about $200,000. (But don’t believe me, believe your CPA.) Experience says it could be less, but unlikely to be much more. Add to that their savings in excess of cash reserves, and maybe some home equity, and they will have gathered roughly $280-295,000.

Yes, the tax/penalty hit was brutal.  You wept. Better tears now, than at retirement, right? You bet.

You also ended up with four little income properties in a great region. You locked in historically low interest rates on all of ‘em. Around 5%, maybe a tic less. Long before you retired, you’d combined the properties’ cash flow with disposable after tax income from your job(s).

20 years pass and you’re 65 — ready to retire

It took you about 15 years to pay them off. It could’ve been a lot sooner, but you were pretty conservative with your income. In the immediate five years before retiring, the cash flow from properties now debt free, accumulated at approximately $75,000 annually. Much of that was tax sheltered. In other words, in the immediate five years prior to retiring, you stockpiled $250-300,000 in cash — after tax.

Oh, and that income? It was projected to be the same in year 5, 10, 15, 20, and beyond as it was the day you acquired the units. The NOI is the same $75,000 it was 20 years earlier. They’re free ‘n clear of debt, so your net worth in these properties is a cool million bucks. We also assumed they’d never go up in value.

Let’s Review

In order to equal that in your 401k, you’d first have to get your invested cash in the stock market up to $1 million or so. You can’t afford many, if any losing years. Good luck with that. Then you’d hafta earn 7.5% — year in and year out. Not freakin’ likely in both cases. You simply aren’t gonna get there.

OR . . .

You gather your available capital, follow the above real estate investment scenario, and make retirement income of $75,000 a year, while sporting $1 million in equity. If you think the projection of flat rents for two decades along with no appreciation in value for the same 20 years isn’t conservative enough, I don’t know what to tell ya. In no 20 year period in our lifetimes has real estate values failed to go up, net. Nor have rents been anything but higher over the same stretch.

Either way, the guy/gal who goes for the real estate is almost guaranteed to retire with a relatively highly secure income — with a million dollar equity available if life makes it necessary. Leave your 401k in the rearview mirror and give your retirement a fighting chance. Remaining in the qualified plan will doom you to a life sentence, not a retirement. 

The numbers are against you. It was planned that way. Don’t take the bait. Do what they don’t want you to do.

Think again.

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Still Believe Your 401k Is a Main Cog In Your Retirement Income Plan? Think Again

No one can argue the fact that Warren Buffett is a great investor.  His track record over multiple decades is just too good to be ignored.  As you know, he prefers to purchase companies or stock in companies.  Nonetheless I look to leverage greatness any where I can in my business.

I found the following three Buffett quotes fit my business model.

Quote 1: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

I am a buy and hold investor that looks to secure rental properties that produce monthly cash flow.   I don’t need market appreciation to continue growing our business.  In fact too much appreciation would likely slow our business down as we would have to stop buying because we don’t buy skinny deals; we define a skinny deal as one with under $200 in expected monthly cash flow.

I would love to hold all our properties for 10+ years and let the cash flow increase with inflation.  Someday we will undoubtedly sell the houses we own and 1031 Exchange the profits into apartment buildings, but until then we are happy with all our little houses.

Quote 2: “It’s never paid to bet against America. We come through things, but its not always a smooth ride.”

I love this quote because it goes against all the noise we see on TV and read in the papers.  The financial world is without question going through a hard time right now, but we will come out of this eventually.

By most accounts we have been in this real estate and debt laden cycle for 4+ years now.  The cycle might have 3-6 more years to complete but it will eventually be over and we will be back to growth again.

You can chose to sit on the sidelines and wait for the all-clear sign or you can get in the market and look for deals that are on sale right now.

I chose to invest now because I want to maximize my profit when the market turns.

Quote 3: “Price is what you pay. Value is what you get.”

Over the last two and half years I have purchased dozens of properties at what I consider land value.  I believe the prices are artificially low, but the value has never been higher.  We have purchased multiple properties for under 40K that produce $900 in rental income.

The value of these purchases will only rise with time, inflation and the slow rise to replacement cost.

Picking only 3 Buffett quotes is a tough challenge as he offers countless gems.  I chose the three above because I believe they speak to the current real estate market we are in.

You can chose to sit on the sidelines and wait? Or You can get distracted by price and forget value? Another option is to count on quick flips which can burn you?  I am going to keep buying long term holds at great values and I know that America/Real Estate will be back on top once the cycle turns.

Good Investing

Photo: Michael Reuter

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Three Warren Buffett Quotes that I follow in my Real Estate Business

If you still owe money on a property and want to sell it using owner financing (creating a mortgage note), would you later be able to sell that note?  The short answer is – yes, usually.

Let’s say that you own a house worth $100,000 that you’re currently renting out, and you owe $40,000 to your local bank.  If you sell the house for $100,000 and receive a $10,000 down payment, you will be carrying a $90,000 note.  This is all quite normal.  Yes, there is a small risk that the bank finds out about the sale and triggers the due-on-sale clause, but that is a remote possibility.

If a mortgage buyer offers to buy your real estate note, they will always be offering you at least $40,000 even if they are just buying some of the payments.  With very few exceptions, mortgage note buyers want to be in 1^st position (senior lien), so will want to pay off that underlying loan.  The same applies if there are overdue property taxes or other liens against the property.

So, if you only wanted to pay off that loan and be done with it, a good note buyer will offer you $40,000 to buy PART of the note (meaning a certain number of payments – for a review of partials, see my blog from a few weeks ago here).  More likely, you want to pay off the underlying loan but also get some cash now.  In that case, the mortgage note buyer may offer you $55,000 to buy a larger share of the note.  The first $40,000 goes to the bank and the other $15,000 goes in your pocket.  Plus, you will receive additional monthly payments in the future.

Of course, this only works if the total value of the underlying loans and liens is significantly less than the note balance.  Using the earlier example in which the note balance was about $90,000, you could not sell the note if the underlying bank loan was $85,000 or if the property is underwater.  A wise note buyer always buys notes at a discount, and a purchase price of $85,000 or more is unrealistic in these economic times.

The bottom line is that the underlying loans – be they bank loans, hard money, or some other lien type – are not necessarily a showstopper if you are considering selling the note in the future.  Selling part of the note is a tool which you will want to keep in the back of your mind in case you decide to utilize it on down the road.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Mortgage Notes – Dealing with other loans

As I have shared in my previous articles, our investing model is based on recycling our investment capital over multiple deals.  In short we buy a distressed asset with cash, repair the property and then after finding a renter we secure a passive investor to replenish our capital.  Our goal is to recycle at least 90% of our capital across each investment property.

Over the years we have refined our model and partnered with several passive real estate investors.  Our investors tell us they value the return and the security of lending against performing assets versus the option of buying stocks or lending on a distressed property, with only promises of future security.

As we’ve continued to work with more passive investors, our model has become more structured and defined. We offer a standard set of returns and terms to all of our passive investors.  This means that on occasion we have had to decline some investors who were looking for shorter terms or very high rates.

Until recently, one of the rules we adhered to was each passive investment would come in the form of a cashier’s check, and we would send payments directly to the investors.  We knew about the opportunities available via leveraging Self-Directed IRA’s, but our business was growing fine via word of mouth and we didn’t see a reason to expand.

I can give you all kinds of reasons why we didn’t leverage this source of capital before, but they would just be excuses. We were simply content with what we had going and we were lazy.

Expansion

That was until we met an investor who wanted to put a significant amount of capital to work via his Self-Directed IRA. The key was the investor was willing to work with us over several deals.  We met for dinner to vet the investor and discussed our program in detail.  We wanted to make sure we were very comfortable with each other before we took the next steps given the potential commitment.

The dinner meeting led to a few follow up meetings, a couple of trips to Fresno and some discussion with the Self-Directed IRA Company.   We needed to make sure we understood all the ins and outs of the investment before we moved forward.

As it turns out, the process is almost exactly like the cash deals we had done to-date.  The process is not quite as fast as all cash deals, but it is by no means slow, as it only takes 2 weeks to fund and close on average.

The good news is we have already completed two transactions with this investor and we have a third transaction lined up for a small apartment building that should fund in late December.

The investor is very pleased as he loves the return and security he gets from lending against a performing asset.

The best part is since we have opened this source of capital for one investor, we have already secured a second investor interested in earning a secured return on his Self Directed IRA Holdings.

Lesson learned: I should have looked to leveraging Self-Directed IRA’s as a source of capital sooner.  IRA investors love the idea of securing a guaranteed return for multiple years and they really like the idea of lending against a performing asset!!!

Good Investing

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Everyone can WIN with Self-Directed IRA Investing