The Roadmap to Successful Investing

investing.

Introduction

At the tender age of 15, I found myself alone and faced with real world concerns such as where to live, how to provide for myself and finish high school. My grandmother, who raised me, had passed away, but had left me the house where I had grown up. This house was to provide the basis for my early income and the foundation where I started my real estate education.

I finished my high school education and set my sights on college. Determination and anger helped fuel my success because many of those around me assumed I would fail without a family unit to support me. I pushed forward and enrolled at the University of Texas where I majored in political science and minored in business.

I continued to use my real estate skills to fund my college education. I earned my real estate license and spent part of my evening and weekend hours working with residential clients because it provided me with the freedom and flexibility to continue my education. During the week, I took classes and worked as a legislative aide to a congressman.

After graduation, I continued to work in real estate. I transitioned to commercial and multifamily properties then into property management. Each move provided new challenges and opportunities to succeed in a field dominated by men.

I taught real estate classes for approximately four and a half years. In doing so I realized most of the information out there on acquiring and managing property is directed at single family housing. I wanted to fill in the gap for those who have a different goal for their real estate investment dollars.

Today, I work with million dollar clients looking to invest in commercial and multifamily properties. My management company enables investors to continue with their careers and family responsibilities as their portfolio grows. I also teach classes and work to help new investors create a strong foundation for economic growth. My clients trust me with their economic futures because I have a strong work ethic and a dedication to the truth.

Use the principles provided in this book to expand your education in real world real estate investing. Within the pages of this book, you will find information from my experience and help with the skills you need to make wise choices in real estate investment.

Understand that nothing in this book takes the place of proper due diligence on your part. Reading this book does not guarantee that you will strike it rich in real estate or that you will not make a mistake. Nothing can substitute your due diligence.

This book is designed to explain my experience in real estate and how I have succeeded. It provides competent and reliable information to the best of my ability and knowledge. It does not provide legal, financial, tax or other professional advice.

Real estate laws vary by state. Consult a legal professional to assist you with matters pertaining to law. Consult a tax professional for information regarding taxes and accounting requirements.

The author and publisher specifically disclaim any liability incurred from the use or application of the book contents.

What? Plan for the Future?

What? Plan for the Future?

In a world where you have no guarantee you will have a job tomorrow or the plans you make for retirement will provide adequately for you, it does not make sense to leave your financial future to chance. History demonstrates you cannot depend on the stock market or the banking industry to safeguard your retirement funds. With inflation rates at four percent or higher, if your investments or retirement funds are not making at least that much, you are peddling backwards. You need investment strategies that surpass inflation. Real estate is one such investment.

Economic analysts continue to warn Americans the Medicare and Social Security systems are nearing bankruptcy. Your only real hope is taking matters into your own hands and plan ahead through investment income.

You might wonder what options you have. You determine your options by:

•  the kind of risk you are willing to undertake

•  how much research you are willing to do

•  how much money you have to invest

•  how quickly you want a return on your investment

•  your risk tolerance

Real estate acquisition of properties that provide cash flow can provide you financial security if you are willing to do due diligence before finalizing your purchase. Real estate provides advantages as an investment vehicle when compared to other investments.

•  Cash Flow Production The main purpose for investing in real estate is to make money. Without cash flow, you have no income and you can quickly find yourself with a negative return. Many commercial and multifamily properties provide real income, making these options true assets and cash flow producers. Your tenants pay you to make the mortgage payment and provide upkeep and repairs. Utilizing a property management company can free you from the day-to-day tasks of interacting with the tenants if you do not want that responsibility. You can pocket a significant portion of the rent you take in once you pay off the property.

You should realize, however, you must set aside a percentage of the profits each month to take care of the property, complete improvements and perform make-readies when you have a vacancy. If you do not budget for these expenses, you might find yourself unable to rent vacant units because you do not have the capital to make the unit presentable for the next tenant.

A property that does not produce enough revenue to cover the mortgage and expenses, regardless of what you do, is not an asset. When it costs you money to keep a property, it is a liability you might need to sell, even at a loss. Some situations might allow for temporary losses because you know the negative cash flow is short term. Short-term situations you need to evaluate on an individual basis include loss due to vacancy or a period of scheduled improvements. However, if you consistently lose money there is a long-term problem, and if not quickly corrected, selling might be your best option. The longer you hold the property, the larger the loss. We will discuss how to reduce the risk of buying such a property in future chapters.

A quick note here about the business aspect of owning property: Do not get emotionally attached to the property. You will lose objectivity and find yourself unable to see and make clear decisions based on the economics of the situation. I will provide more information on this as we progress, but this is a key strategy when investing in real estate. If you forget this or violate it, it might cost you a considerable amount of money before you finally understand this vital truth.

•  Appreciation. Income producing real estate typically appreciates in value over time, although housing values might decline during times of economic recession or depression. Commercial properties maintain value much better over time, but might also decline in value when the economy is poor. Appropriately maintained properties in healthy neighborhoods attract tenants and allow property values to increase as wages and commerce increases. An increase in property value means you can raise the rent and secure a larger profit margin. Obviously, your due diligence research prior to purchase helps determine where property values are increasing and where neighborhoods are declining.

Identify characteristics of a community or city where property markets are improving. For example, if fair market values over the last six months are increasing, you might have chosen a healthy area.

Appreciation should be the icing on the cake. Do not purchase a property solely for appreciation, unless you have significant cash reserves. Otherwise you may be required to continually subsidize the property -something I do not advocate. Remember, appreciation is the icing on the cake but the cake must still taste good.

•  Depreciation. You can take a tax deduction for depreciation on commercial and residential buildings. The depreciation percentage for residential properties is less than that for commercial properties. Land does not depreciate and remains valuable even if the buildings are removed due to fire or natural disaster.

Hire a tax accountant who is well-versed in real estate investing to help you with this. You can save money if you understand you pay taxes on the depreciated amount when you sell the property. This is known as recapture. The difference in the actual sale price of the property and the depreciated amount can make a huge difference in the amount of taxes you will pay. There are various levels of depreciation, which a property investment tax accountant will explain and show you how to pay the least amount of tax legally possible.

If you use the best depreciation formula, you can work 1031 property exchanges that leave you with little or no tax due at the end of the sale. A 1031 allows you to relinquish or sell one property so you can trade up for anther property of higher value. This might provide you the best financial benefit.

•  Control. You have some control over what happens to your assets with real estate. For example, you determine what you are willing to pay for a property and what you can do with it. You determine when you want to close, how you negotiate and when to walk away from the table. You, the buyer, have more control of that aspect of the acquisition than the seller. This gives you more options and leaves the seller with only a few options in response to your choices.

Once the property is yours, you have limited control over many areas. You determine how you manage the property, but you cannot determine what your tenants will do in response to management. You determine when a tenant becomes a bigger headache with lease violations than the rent is worth and move to evict. You can raise the rent when demand is high and lower the rent when demand is low, determine the amounts for deposits and the amenities you offer to attract better and more stable tenants. You cannot control when the area’s main employer moves, leaving many workers with no source of income or a means to pay rent.

You choose the plans you have for the property in the future. You decide when an asset becomes a liability and make choices about whether you sell or change your plans for the property. For example, if area properties are losing value, you could review your options to determine whether selling the property and purchasing another one in different location provides you with better investment options.

In reality, this is controlled chaos because you never really have one hundred percent control. You cannot control what similar properties in the area do, so someone needs to keep an eye on your competition. For example, if the area where you purchased property has an over-abundance of apartment complexes offering more amenities and renovated units, you need to determine your strategy. You might have to conduct similar renovations to bring in new tenants to fill your vacancies or reduce your rents. On the other hand, you might decide you can sell the property as is and invest in a different location where the supply is smaller and you gain a larger cash flow.

You need emotional distance to make these choices. This is one place where a property management firm can make suggestions that clarify your options. The management firm can assist you with public relations, provide information about activities in the area and suggest options to increase your cash flow. They can suggest property improvements and let you know when other investors in the area are making upgrades that affect your occupancy levels. They bring objectivity to the table that you might not have, but need. Objectivity allows you to control your responses and make the right decisions.

•  Financing. Real estate investors have access to financing that might not be available for other types of investment. The type of financing that best fits your needs is determined by your goal for a specific property.

Long-term, fixed-rate loans allow you to spread the mortgage payments out over twenty to thirty years so the payments are more affordable and your cash flow is higher. When you get ready to sell the property, you know a buyer can apply for long-term financing and allow you to get your investment money released following the sale.

An adjustable-rate mortgage guarantees a set interest rate for the early years of the mortgage term, then adjusts to reflect market conditions once the float period kicks in. If you plan to hold the property for a short period such as a few years you will exit the loan before the float period begins. This could be safe but if you plan to hold the property long term a fixed-rate mortgage is much safer and easier to budget.

Short-term loans work well for wholesale and rehab purchases. The monthly payment is higher than a long-term loan, but you do not plan to keep the property long enough for that to be a problem. With short-term loans, you must move forward quickly. Otherwise, if you own the property longer than originally planned, the higher loan payment can negate your profit. It is important to accurately identify expenses to avoid surprises that will negatively affect the bottom line. You need ninety percent or better occupancy for at least the past three consecutive months to conventionally refinance the property at a better rate, so work hard to take advantage of this time period.

Package finance loans work well if you buy a wholesale group of properties. These bulk purchases give you a better deal on the purchase price and allow you to pick and choose the best properties for your portfolio. The drawback to package deals is that you have to refinance the package to sell a portion of it.

Hard money is financing you get