Newbie

General Real Estate Investing
1

Hello everyone!

I found this site today and I’m so glad. I’ve done some research and I would like to invest in real estate. Before I commit myself to it, I need a little more guidance.
As of now the questions I have are:

  1. How do investors acquire properties on a $50,000-$60,000 salary? I’m thinking in terms of someone making $50,000 from a day job saying they have 3-4 properties. Maybe I’m clueless on how the financing works :huh .

  2. How do you determine if a seminar is legit or a scam? Are there any clues?

  3. If there is such a thing, what are the most popular investments? What comes to mind is all these flipping property shows on T.V.

  4. If there’s such a thing, why are they so popular?

TIA! :biggrin

2

Hi, queenyisme!
I’m a newbie, too!

  1. Read more books. There are books at the library that teach you how to get into deals with little or no money, and no risk. DON’T USE YOUR HARD EARNED MONEY to finance a deal! Some of the authors of books that I’ve been reading are ROBERT KIYOSAKI, PETER CONTI, and ROBERT IRWIN. Try them.

  2. Find a Real Estate Investing club in your area. There are probably other beginners who have done seminars and can tell you all about them. You’ll find that others are doing well with just a mentor.

  3. The most popular investments are the ones that create monthly cashflow, so you can quit your dayjob. Everyone has their favorites. BUT FOR BEGINNERS, there are more appropriate methods for us. Just keep reading your books and networking with other investors. You’ll learn all about it.

  4. Why is flipping (rehabbing) so popular? Only because it’s made for reality TV. The Do It Yourself network puts on these shows because it’s entertaining to see people fix up ugly houses to make them beautiful, and make lots of $$$.

I’m still learning, so you’ll see some of my “stupid” questions posted up here, too. But, I’m more than happy to help if you have anymore questions.

3

queeny,

I don’t have any answers for you on the rest of your questions. As to your first question, I don’t know how other investors acquire their properties, but I can tell you how I acquired my first few on taxable income less than $35K.

In 1980, my taxable income was $16128. I used my veteran’s entitlement to purchase my home with 100% financing. In 1981, I got transferred and turned my home into my first rental property.

At the end of 1982, my taxable income had risen to $25579. I used an FHA 95% loan to purchase my second home. I lived in that home until some time in 1984 when I moved into my third primary residence. In 1984, my taxable income was $31859 and I purchased this property with a 95% conventional loan. The second home became a rental. When I got transferred again in 1985, the third home also became a rental.

During the period between 1981 and 1985, I had acquired three primary residences that were converted to investment rental properties. Some time before my job transfer in 1985, I sold some land in Florida I owned, and used the net sale proceeds to purchase an investment rental also using 95% financing.

At the end of 1985, I owned four rental properties and my taxable salary for the year was $32220. With careful personal financial management, I was able to save the funds for downpayment and closing costs for each property I purchased.

Additionally, this was all possible, because each time I purchased a new property, I traded down. The first property was a 3/2 SFR, the second property was a 2/2 TH, the third property was a 2/1 condo. Each property I purchased for my primary residence was a little less expensive than the previous one.

This allowed me to use a “waterfall” approach to cover my housing expense. My direct housing expense was the mortgage on the first property which I paid from my take home pay. I used the rental income from the first property to pay the mortgage on the second. I used the rental income from the second to pay the mortgage on the third. When I moved for the last time, the rental income from the third property covered the mortgage on the fourth. From 1986 to 1990, I was an apartment renter. The rental income from my fourth property covered my rent.

Back in the early 80s, I did not know any creative financing techniques. Everything was done with conventional financing in a realtor assisted purchase. All the properties were MLS listed.

I can not tell you how other investors might buy three or four properties on a $50K salary. I can only tell you how I did it with less.

4

Thanks CZR and Dave T!!!

CZR- Hopefully we’ll see each other on here alot!!! I need to find an investment club ASAP!

Dave T- Your answer was informative! It’s funny because you’ve explained my “proposed” stratgey. I was thinkking to refi my primary residence and rent it out, buy another property and so on until I’ve gotten to about 3 -4 properties. I didn’t know if my plan would work but your experience shows it will if I do it right. The buy down idea sounds interesting.

5

There are various investment strategies, so hard to say which ones you are referring to. I am assuming those who own 3 to 4 rentals on $X salary. They may have saved the down payment, they may have done sandwitch lease, they may have purchased it on sub2…etc.

Where did you hear of the seminar? what exactly are you expecting to get out of it? you won’t learn the business in 1 or 2 days bootcamp, in fact you will forget most of what you learned the next morning. Seminars are good to teach you new strategy, but that assumes you have one now. You are better of starting by reading as many books on investing as you can first, and pick up the courses for cheap on ebay. Don’t overpay for a bootcamp.

Flipping properties TV shows are nothing more than Reality TV. This business is nothing like that, and you will learn that quick. I’ve had sellers who called me wanting to sell their “flip this house” wannabe houses because it was not what they expected.

This business is like the restaurant business… which type of food do you want to serve? how big do you want the restaurant to be? is there drive-through? there is no simple answer, you just have to read and learn as much as you can and then you will find something that pulls you in.

The biggest mistake people make is dive into this business thinking riches is just waiting for them. Thats no different than opening a burger joint and expecting McDonalds income.

6

Hey Queeny. You don’t have to spend a fortune on seminars. Go to the bookstore and start out with 2 books. It should cost you about $40. The first book is " The Millionare Real Estate Investor" by Gary Keller $25. Then get “Rich Dad Poor Dad” by Robert Kiyosaki $15. They’re not get rich quick schemes. The first book will teach you the basics of RE investing and money management. It also has proven models derived from over 100 millionare real estate investors. I may have to buy another one beacause I read it so many time its getting worn out. The second will give an insight on how to see things the way rich people see them and the way poor people see them. These books will set you on your path and help you to form a team that will help you reach your goals. With RE investing, the good thing is that education ( before you buy RE ) is cheap. Books, investment/landlord associations, this site. The thing about these flipping shows on TV are all about the drama. Not about how they got their financing or what they actually sold the house for. Many show the “projected profit”. They make it look like it’s so easy but you have to remember that you’ll need a lot of people on you team to make it work. Even then you may not make the money think. Jst keep feeding your education and you’ll find the right path for you. Good Luck.

7

Dave T,

Wow! what a wonderful approach to acquire rental properties! I am learning a lot from reading your posts.

Can you please explain how you would handle the mortgage payment(s) when you didn’t have renters for your rental properties between 81-85? I am not sure if it had ever happened to you, but if it did, I just wanted to learn the strategy and how you handled it.

Regards,
Newbie

8

have the same question.

Hi phlemboy,

I’ve read rich dad, poor dad. It was a very good. I’ll be sure to go to the library next week and pick up your other recommendation.

Thanks everyone for your answers!

9

Queeny/NDLM,

My strategy never generated a positive cash flow. I had to cover the shortfall with discretionary income. This was easy at the time because with my 1980 income, I could afford the mortgage payment on the first property when it was my primary residence. I rented it out for $650 per month and had a negative cash flow from the beginning because my mortgage payment was a lot higher.

My idea was that if I can afford $x mortgage payment to purchase one property, I could leverage the income from that property to purchase another, and another, and another. I always had $x mortgage payment, but by leveraging the income from that property to purchase the next and so on, I was able to make my $x out of pocket purchase four properties rather than just one. Of course, my tenants helped.

Yes, there were times that my rental income came up a little short. I did not have 100% occupancy and my operating margins were fairly close to breakeven so there was little positive cash flow. Fortunately, if you followed my salary increases during those years, my salary nearly doubled from 1980 to 1985. That created enough discretionary income to cover the vacancies and unscheduled repairs.

In those years Congress modified the tax code to encourage capital investment and gave us the Modified Accelerated Cost Recovery System (MACRS) with depreciation schedules from 15 to 18 years rather than the 27.5 years we have today. Additionally, there was no passive loss allowance cap. The large depreciation expense created so much net passive loss, that I had no taxable income for a couple of years during that time. Imagine how much more discretionary income I had when there was nothing being withheld from my salary for federal income taxes.

The Tax Reform Act of 1986 changed all that by placing caps on the net passive loss allowance, eliminated MACRS and gave us the general depreciation schedules we have today, introduced depreciation recapture, and set the long term capital gains tax rate at 28%.

After 1986, I could not make money with negative cash flow property because the tax benefits I had previously enjoyed went away. I had to revise my business model to only purchase property that could sustain itself and I had to either make my negative cash flow properties profitable or sell them. It took me three years to right my ship.

From 1989 to 1994, I concentrated on mortgage debt reduction and finally got a couple of my properties free and clear using excess cash flow from my rentals. My financial plan at the time was to have four free and clear rental properties by 1997 because the cash flow from four free and clear properties was all that I needed to replace my W-2 take home pay.

I was able to use a negative cash flow strategy effectively because the tax code was so advantageous at the time, and I had discretionary income to cover the occasional vacancy. This plan can still work today, but you will need a higher income than I had and you won’t have the tax code to help you out.

10

Hi Dave T,

Your strategy fits my lifestyle perfectly. I am not a REI, I am just looking to acquire few properties for rentals and hold them for a long time and hopefully I will be able to pay them all off at one point. I guess I am going to use your strategy to start out with even though in the beginning it might generate negative cash flow. In addition, I really like the way you responded to the post below:

http://www.reiclub.com/forums/index.php/topic,33916.0.html

"I won’t buy a property for a rental that I won’t live in myself. Consequently, I have a little different composition in real estate portfolio than Bluemoon and propertymanager. My properties tend to be in neighborhoods populated by white collar folks. Parking lot has a lot of sedans and SUVs, very few pickup trucks. My town car won’t stick out like a sore thumb if I lived in one of my rentals.

I admit that my ratio of rental income to purchase price may be a little lower than propertymanager or bluemoon, but I believe I tend to get tenants who stay longer than they might in a lower rent neighborhood. On the other hand, I suspect that my vacancies tend to last a little longer than I might experience in a downscale property."

Here is my next question:

I did a little research on the MACRS you mentioned in your response, and I have no clue of what it was saying. Can you explain it in plain English? An example would be great.

Modified Accelerated Cost Recovery System (Macrs)

Provision, originally called the Accelerated Cost Recovery System (ACRS), instituted by the Economic Recovery Tax Act of 1981 (ERTA) and modified by the Tax Reform Act of 1986, which establishes rules for the Depreciation (the recovery of cost through tax deductions) of qualifying assets. With certain exceptions, the 1986 Act modifications, which generally provide for greater acceleration over longer periods of time than ERTA rules, are effective for property placed in service after 1986.

Under the modified rules, depreciable assets other than buildings fall within a 3-, 5-, 7-, 10-, 15-, or 20-year class life. The 3-, 5-, 7-, and 10-year classes use the Double Declining Balance Depreciation Method with a switch to Straight Line Depreciation. Instead of the 200% rate, you may elect a 150% rate. For 15- and 20-year property, the 150% declining balance method is used with a switch to straight line. The conversion to straight line occurs when larger annual deductions may be claimed over the remaining life. Real estate uses the straight line basis. Residential rental property placed in service after December 31, 1986, is depreciated over 27.5 years, while nonresidential property placed in service between December 1, 1986, and May 13, 1993, is depreciated over 31.5 years. A 39-year period applies to nonresidential property placed in service after May 12, 1993, although certain transition rules apply.

11

I “misspoke”, we got ACRS in 1981, and MACRS replaced ACRS in 1986. It was ACRS that gave us the 16-19 year depreciation schedules for our rental dwelling structures, depending upon the year the property was placed in service.

I guess when I need a written shopping list when buying more than three items at the grocery store, I should not rely on memory so much, especially memories more than 20 years old.

12

I am glad you asked these questions because there are a number of us who, are also trying to figure all this out.

13

Hey Silas,

   Don't be bashfull. Jump right in with your questions! That's why we're all here. We can all learn from each other, network etc.. It sure beats  :banghead :banghead :banghead :shocked

                  Mike