Pssst – Wanna Be a Real Estate Millionaire?
FOREWORD
In 1958, William Nickerson wrote “THE” book on how to make money in real estate. The book was titled “How I Turned $1000 into $1 million in Real Estate in my Spare Time.” I was in my early-20s and wanted to be a millionaire by the time I was age 30. After reading the book, I figured I could do that, so I did. It’s also important that you realize $1 million of purchasing power in 1960 would require more than $7.69 million today (circa 2012 due to ongoing inflation) (source Bureau of Labor Statistics website inflation calculator at http://www.bls.gov/). It’s actually much worse due to the higher taxes today and the way they’ve changed the inflation calculations. The BLS figure only takes direct inflation into account and in recent years, the government has dramatically changed (fudged) the way they calculate inflation in order to make it appear lower than it really is. However, we’ll learn some ways to legally avoid these higher taxes under current tax laws.
Today, thousands of books have been published on real estate investing. I have yet to find one as good as Nickerson’s. It is still the best “How To….” book I’ve ever read – on any subject. I’ve written this book in gratitude for his pioneering efforts.
But wait, you say! Everyone “knows” that real estate is in the dumpster today. After all, we’ve had the bursting of the real estate bubble and all real estate prices are much lower today than just a few years ago. We’ve got the banks foreclosing on millions of homes and at least a fourth of all home owners owe more on their houses than the market value of their house. Unemployment is extremely high and folks can’t find work. Why would you expect me to want to invest in real estate during these terrible economic times? Ah, grasshopper, because this is the precise time when the greatest profits are made. Keep the faith and reserve your conclusions until you finish this book.
There isn’t much new today in real estate investing, but real estate has become a big business for self-appointed gurus. As a result, they’ve given all kinds of new names to the very same techniques we used back in the 1960s. However, according to them, you couldn’t possibly learn what you need to know from a mere book, so these same gurus want you to spend thousands of dollars to attend their boot camps. If that’s the only way you can learn, then by all means, take some of those courses. However, I learned from a book because that was all that was available when I started. If I can do it, so can you! If you do decide to attend some boot camps or attend expensive lectures, I suggest you first check-out the following website:http://www.johntreed.com/Reedgururating.html There are a lot of phonies and con artists in this field, and John T. Reed’s site is one way to double check the credentials of the guru you’ve selected before you risk your money. Reed is a very difficult person to try to get to know, but I believe he has presented an accurate assessment of the players based on what I think I know about those same players. Another way is to just Google the guru’s name. You’ll be amazed at some of the comments you’ll find on-line.
One purpose of this book is to familiarize you with all of the techniques you can use to purchase- or make money in real estate. Another purpose of this book is to take you step-by-step through as many transactions as possible so that you will know what to expect in each instance. It is not the intention of this book to sell you on the concept that real estate is a good investment medium. It is not the intention of this book to convince you to invest and become wealthy. It is not the intention of this book to motivate you. I accept you as an adult looking for helpful information and I expect you to use-, or not use, the information provided as you see fit. That decision is strictly up to you. I think you’d be making a mistake to not implement what you’ll learn in this book, but that is your decision. Remember Pareto’s Law? That law states that only 20% of the folks reading this book will do anything whatsoever with the information they learn. Only 20% of the 20% will really follow through and apply what they’ve learned on a consistent and on-going basis. That means only 4 people out of every 100 folks reading this book will make a sincere effort to understand and apply their newly-gained knowledge. In what category will you place yourself?
If I’ve done my job as the author of this book, it will become an investment bible for your real estate empire. I read Nickerson’s book from cover-to-cover seven (7) times and I re-read various portions of his book hundreds of times. Every mistake I ever made I subsequently found covered in his book. I just missed it or it didn’t register when I first read it. I tell you this because unless you already have a solid background in real estate investing, you’re not going to understand everything I have to say the first time you read this book.
The other aspect I hope to achieve with this book is to make it succinct. I get very upset after reading a 300- to 400-page book only to realize that the author could have presented the entire content in about ten pages. I intend to respect the value of your time – and mine.
Chapter 1: Getting Started
The road to wealth begins with the first step. Whether or not you have money now, start your real estate program as though you have none – or very little. A good admonition I learned from another investor is: don’t write big checks or make promises you can’t keep or assume existing bank loans. If it’s not your money and you didn’t promise a bank you’d be responsible for the loan, it’s pretty hard for you to lose money. You will make money helping other people solve their problems. In fact, you’re in the problem-solving business and real estate is just the tool you will use. You don’t have to make promises you can’t keep just to get someone to work with you. If you understand what I’ve just said, you should not be the least bit fearful of investing in real estate.
Basic Rule: Live where you wish but invest where it makes sense to invest. That may- or may not be where you live. When I first started to write this book, Southern California’s Orange County was one of the “hot” markets. I saw it as the “Greater Fool” market. That is not to say Orange County is not a good place to live. It is to say it may not be the best place to invest. People buying in Orange County did so because they thought they’d be able to sell the property for even more money to the next buyer (greater fool). Present homeowners are barely able to make their payments now. If they took-out an adjustable-rate mortgage, they’re terrified those interest rates will increase and that their mortgage payment will go higher. And they can’t refinance because they have no equity. Until you have a firm grasp of what you’re doing in real estate, stay away from these “Bubble” markets. The one exception would be if you find someone that just wants to give you the title to a house just to get rid of it. As long as you don’t take title in your name or promise to make their mortgage payments, you can’t get hurt, but more on that later. For beginners, however, this is probably not where you should start.
Where would it make sense to invest? Real estate prices go up and they go down. These fluctuations are based on the local economy to a great extent. The trick is to find a market where the economy has been poor but is now starting to show some life. It’s starting to recover. Perhaps new businesses are moving into the area and new jobs are being created. As the local economy recovers, the demand for the local real estate will increase and the price of that real estate will increase. Studies show that for every one new basic job created, seven other service jobs evolve. These would include dry cleaners, bakeries, restaurants, service stations and pet stores. On the Internet today, you can find demographic statistics on almost every city in the USA (http://www.numbeo.com/common/). A careful perusal of these data will get you pointed in the right direction in the right geographic area. The old caveat was to not venture more than a 50-mile radius from where you now live. If you can find a recovering area within that radius, by all means start there. If not, don’t let that 50-mile restriction hold you back. Move outside this artificial box. Take the time to check out promising areas regardless of where they are located. This statement ties-in with the “Location-Location-Location” admonition you’ve heard many times. You can buy a great property in the wrong location and loose your shirt. You can also buy a poor property in an excellent location and probably make a profit. Location not only means the quality of the neighborhood, it also means the quality of the local economy. Finding this place to start is your number one priority.
Always keep in mind that you will be letting other people pay your bills. Always! When I started my real estate investing, I would never consider a property unless it showed a 10% triple-net return. That means that after paying all the fixed costs such as taxes, insurance, utilities, maintenance, management and a vacancy factor allowance, there was still a ten-percent positive net income cash flow. Using an example, suppose an apartment building (could be any income type of property) has a scheduled gross income (SGI) of $15,000 per year. You arrive at this figure by adding up all the rents and any other income sources such as laundry room income as though there were no vacancies during the year. Then actual costs of operation are subtracted including a realistic allowance for vacancies. For our example, let’s say those costs total $5000 per year (that’s a 33% overhead which is not unusual and can be much higher). Subtract the $5000 operating costs from the $15,000 SGI and you have a net operating income (NOI) of $10,000 per year. Finally using this NOI of $10,000, the most you should be willing to pay for the apartment building would be ten times the NOI or $100,000 (see Appendix for other number-factors). When dealing with larger properties, you can frequently achieve even larger net returns. As I write, I have a property at 25% triple net and another at 40% triple net.
$15,000 Scheduled Gross Income (SGI)
- 5,000 Fixed Operating Expenses
$10,000 Net Operating Income (NOI) (Before mortgage payment, if any)
x10 NOI multiplier for a 10% net-net-net return after fixed expenses
$100,000 The maximum price you would be willing to pay for this property.
Think of the triple net as representing how long it will take for you to earn back the entire purchase cost of the property from just the net income it generates. At 10% per year, your tenants will repay you the total cost of the property in ten years. At 25%, the tenants repay the total property cost in 4 years. At 40%, the property cost is recovered in 2-1/2 years. Note this is all positive cash flow. Somewhere in the late 1960s, doctors and other highly paid professionals started buying income property only for the tax deductions and because of that, they paid little or no attention to the cash flow. As a result, many income properties started selling for values not supported by the cash flow they generated. In fact, many buyers not only had no positive cash flow, they even had to pay out of their own pockets every month just to cover the bills. Does that make any sense (cents)? Not to me! It’s still happening today. I know several younger investors who buy brand new houses from the Builder-Developers with the idea of renting them now and selling them at a profit after three years, but which require $100- to $300 per month out-of-pocket carrying costs now in addition to the rents generated during that 3-year holding period. Remember the Greater Fool concept discussed above. Dumb is all I can say.
Note that in the above cash flow analysis, I did not mention a mortgage payment. The value of a property is based on the amount of cash it generates (well not completely but close-enough for our discussion at this stage of your introduction). How it is financed is up to the buyer. Any tax benefits become frosting on the cake because those benefits are unique to each owner. For you to be interested in buying any income property, the property must show positive NOI and must not be priced higher than a 10% triple net return would dictate. We’ll be discussing specific investment properties later using these concepts, so just accept the above as an introduction.
There are numerous ways of investing in real estate. I’ve briefly reviewed how apartment buildings are valued in the above discussion. Since we’re just getting started, it’s important for you to know at least the names of some of the many ways to profit from real estate. For our initial introduction, I’m simply going to list the major areas of interest. Using examples throughout the book, I will show you how many of these techniques work in real situations. What will be most important for you now is to select the two or three areas of current interest and then focus on those areas; at least while you’re just getting started. The overall areas (not listed in any order of importance) include:
- Rehabbing fixer-uppers or junkers and then selling as a pretty property
- Flipping fixers to a rehabber for a modest mark-up
- Buying pretty property at below retail market prices
- Optioning property for a period of time during which you find a buyer
- Leasing a property with the option to buy at a later date
- Investing in Tax Liens
- Buying Tax Deeds
- Buying (and selling) discounted paper (mortgages, Trust Deeds)
- Negotiating short sales with lenders
- No money down (at least not your own money)
- FSBOs (For Sale By Owner)
- Getting the owner to just give you the deed (title) to the property
- 1031 Tax-deferred exchanges
- Bank REOs (real estate owned) – non-performing assets
- NODs (Notice of Default) (Preforeclosures)
- Foreclosures
- Prefabricated modular structures
- Storage rentals
- Shopping centers
- Industrial buildings
- Raw land and land development
- Real Estate Investment Trusts (REITs)
- Mutual Funds specializing in real estate investments
- Real Estate Limited Partnerships (RELPs)
- Section 8 HUD- and VA financed properties
- Resort Condos
- Second- and vacation houses
- Condos as everyday residences
- Buying your own island, castle, any unusual or exotic property
- Hotels and Motels – the real estate; not the business itself
- Specific-use real estate such as gas stations, car washes, restaurants
- Office buildings
- Real estate auctions
- Time shares
- House exchanges
- Condo conversions
- Billboards
- Parking lots
- Foreign Real Estate (Outside the USA)
- Develop “Infill” lots (Vacant lots in developed neighborhoods)
- Lease Post Office facility to U.S. Government (Well…maybe not anymore)
- Bed and Breakfast
I realize you probably don’t completely understand what the above list represents but by the time you finish this book, you will know how each works. The reason I caution you to pick only one (2 or 3 maximum) for starters is that you need to learn a couple of areas thoroughly before you expand into other areas. Additionally, some of the above require “active” participation by you while others are considered “passive” income generators (PIGs) requiring almost none of your time. You’ll need to decide how much time you’re willing to devote when you first start out. Ultimately, you’ll want to become familiar with all of the above because you won’t want to pass-up profit opportunities as they present themselves to you in the future.
Finally, start at the bottom; the beginning; the first level. Regardless of how much money you now have, if you have no real estate experience, start small. Yes, many beginners have been lucky with large projects in hot markets, but that’s not how to push your luck. If you don’t bite-off more than you can comfortably chew, you won’t be panicked when something goes wrong. If nothing can go wrong, it will go wrong and at the worst possible moment, so be forewarned.
One final caveat to start: Do NOT tell your friends or co-workers what you are planning to do! They will always tell you “it can’t be done.” You don’t need this kind of grief. Just do it first and then let them observe that it is possible.
NOTE: This is the first installment of the Book. I will be publishing the rest of the book on a chapter-by-chapter basis. Stay tuned…