Tuesday, December 31, 2019

7 Reasons Why Real Estate is the Smartest Investment

With the economy every changing and inflation on the rise, it’s no surprise that the amount of money you made 10 years ago barely gets you by now. With the economy in an ever-changing state, many individuals are turning to investment opportunities to make extra money, which can then allow them the opportunity to better provide for themselves and their families. In this blog, we explain why real estate is a wise investment to consider.

Bring in Positive Cash Flow
Perhaps the biggest benefit of deciding to invest in real estate it provides a regular income stream that is higher than what a normal stock dividend yields. Real estate investments secure assets and offer the financial security you wouldn’t otherwise have in other investments.

Leveraging to Multiply Asset Value
When you invest in commercial real estate, the debts you place on the asset is usually much higher than whatever the original equity was – by using this leverage, you can buy more assets with less money, which will multiply their assets and increase equity.

Hedge on Inflation
Real estate investments have been proven to show the highest inflation correlation when compared to other assets. Unlike other investments, with real estate, as inflation increases, the price of real estate will also rise.

Maximize Tax Benefits
Real estate owners and investors benefit from the U.S. Tax Code in a number of ways. Real estate owners usually have unlimited mortgage interest deductions and they’re also allowed a provision that gives investors the chance to defer taxable gains into the future.

Asset Value Appreciation
Inflation takes a significant toll on purchasing power, but as time goes on, you’ll find that your assets and property values increases. If a majority of your income is coming from your real estate investments, you’ll find that the property’s increase in value will correlate to an increase in your net income.

Feeling the Pride of Ownership
At the end of the day, you can’t put a price on the feeling of pride you get from successfully managing real estate. Although homeownership is not an attainable goal for most people, the thought of managing several housing units as a real estate investment can offer a similar sense of pride.

Saturday, December 28, 2019

What Makes An Investment "Risky"?

A few years ago, I had a chance to attend a roundtable conference with local business owners. My intention was to meet with at least 3 people who may be interested in learning more about my business so we could potentially discuss a mutual benefit of working together.   This could have been through either as a borrower or knowing someone who needed a loan, or finding a really good real estate deal, or to possibly discuss investments available within my business at the time. In other words, I was looking to meet someone who may be interested in investing someday.  

Thankfully, I was able to talk to at least one person about investing some money, and as I described our business model to him, the topic of risk came up. He said to me, "Isn't that risky?"

Personally, I love when this topic comes up because it allows me to discuss the difference between “risk” and “risky.” 

Everything has risk, I told him. Is there risk in walking down the street with your net worth in your briefcase?    Is there risk with just putting your money under your mattress or in a safety deposit box?  Is there risk in just keeping your net worth in a savings account?  Yes to all of it, so in essence, the amount of risk may then lead you to determine if something is “risky.”  To this, he agreed.

I then asked him, "If you knew the downside was covered, how many deals would you get involved with?” In other words, if you had a very high comfort level for covering the downside, would you still consider a deal to be “risky?”

I shared with him that “risky” is associated with lack of the right financial education, and that a savvy investor's goal mentality is to cover the downside first. We manage risk by studying it, managing it, and covering it as much as possible. While it is impossible to eliminate all risks, if we can manage these risks to the largest extent possible, we can maximize profits by rarely losing.

This is what I call the “Banker's Code Investment Strategy.”


Thursday, December 26, 2019

Save 20% in Taxes.

How do you save 20% in taxes?    

How to Get Long Term Capital Gains Owning Less than 1 year

The law is clear.  When you own an asset for less than a year, you're subject to short term rates.  (15% vs.  35% or whatever your tax bracket states).   However, there is a workaround. sometimes refered to as a loophole.  It's a legal strategy to couple your short term asset with a long term asset.  I like to get an option for $1 on a long term asset, then sell this along with the short term asset.  You can use a timeshare as well. 

Options:The Swiss Army Knife of Investing (Seller Financing Part 2)

Have you ever seen that red little pocket knife that has everything you could think of including a knife?  I used to love those little knives. 

Consider options your swiss army knife of solutions for a real estate transaction.  If there is every a time challenge, think option.  Remember time issue = options.

The funny thing about Options is no realtor knows how to use them.  I've yet to meet a realtor who knows how to describe an option or has ever used one, but they are right infront of you every day.  If you've ever filled out a purchase agreement, it can be quickly modified to be an option.  Using the liquidated damages clause, or "no penalty for not buying", the purchase agreement can quickly become an option agreement.

An option is simply a unilateral agreement (instead of a bilateral agreement, two, it's unilateral, one) that states the seller must sell for this price and within this period of time, and the buyer doesn't need to buy.  The seller must sell, but the buyer doesn't need to buy.

This becomes powerful in locking up various pieces of property for a period of time with the goal of putting together a big deal.  It's also a good tool to use for getting in the way of the path of progress.  For instance, a farmer owns a bunch of land, and there's a freeway coming through.  The investor can leverage an option from the farmer for a very low amount down (usually 1% of the strike price or less), for the right to buy the property some time down the road.     It's so simple but yet so powerful.  So if you can imagine if you did this on a grand scale, for a small amount invested you have control over a large amount of real property.  No other place in the world in any type of market, can you get this type of leverage.  (1:99).   Options are very powerful.

 Why do we mention it here?  Because it is a form of seller financing.  The seller is allowing the investor to tie up the property and market it, while the seller still owns the property.  In the next post, I will show you how to use options combined with a lease to make it a home-run technique.

Also, a side note, you can exchange options as well.  Using a 1031 since it's a piece of real property, you can actually trade them, sell them, exchange them, leverage against them (borrow against), or exercise them.

Monday, December 16, 2019

Why Sell a Home with Seller Financing in Central Minnesota (Part 1)?

My mentor always told me that a confused mind says no.  So let's start with a simple broad based definition of what Seller Financing is, for the purpose of this article, then we can get into the benefits.

Seller financing broadly defined, is anything short of the seller getting all of his/her consideration (money or other) all at once.  If the seller is waiting for any amount of time for any of their money, that is seller financing.   It's also called seller participation, because the seller is participating in the future of the property, even though they've already sold it.   Just because they sell, doesn't mean they need to get paid. 

There are just as many alternatives within seller financing as there are stars in the sky.  I will focus on the most common that we use and focus on for this quick post. (Sub2, Options, Lease Options, Seller Carry Back).

Buying Sub2:
The Sub2 option is the most common of all seller financing models that we've used, and the most elegant, (imho).  Sub2 is short for Subject to, which is short for Buying Subject To the existing mortgage.   In a nutshell what this means is title (ownership) transfers, but the financing stays in place.  If Bob and Suzy Smith own the property and they're selling to Ira Investor, Ira gets the deed to him, and the loan isn't touched.  It's still in Bob and Suzy's name and Ira keeps paying the loan going forward.   The loan stays in place, and Ira becomes responsible for it.  This is not a legal responsibility, but a moral responsibility.  Ira is making the promise to pay, or committing to make the payments, and so he is responsible for this obligation.  Legally though, it's still in Bob and Suzy's name, so they ultimately bear the responsibility of that loan since they were the ones who signed the note.

The benefits of selling this way are 3-fold.  Number one, usually you can command a higher price for the home.   First off, if you want an all cash offer, it will be much lower if you can't offer terms (seller financing).  There are really two sides to the scale, price or terms.   If you want the highest price, you need to be willing to accept the worst terms.  If you are willing to consider a lower  price, then all-cash can be an option for you.  All-cash is just a term of the sale.  Sometimes it's not great.    So selling Sub2 is a great option to get a higher price.

Additionally, the seller's credit is positively impacted by having a performing loan on their credit profile.  As each month's payment is made, the credit profile gets stronger and stronger.

Lastly, the speed of sale is usually a positive for the seller.  The seller oftentimes wants a fast sale, or a solution to a problem property.  This type of transaction can happen in as soon as 2-3 days, once title is checked out and loan balance is verified.  We've closed in as soon as 5 hours on Sub2 deals.  It's a great strategy for solving problem properties quickly.

I uploaded a quick video of how we do this on youtube.com

With the goal of keeping these short, I'll push the other strategies into another post.

Monday, October 7, 2019

Why Consider Investing Outside of the USA?

There's a certain mystique in flirting with the idea of investing in a foreign land.

Why is that?   Some, like me, are looking for a place to retire.  What could be better than having a place that pays for itself over the next 10-15 years.   Some just want a change from their home country.  Others want to run from something or someone, whether that's family or an ex-wife who still gets invited to Christmas with your family, or some other business reasons.   Some people just want to improve their weather.   Most just want a change, or they're looking for something.  They maybe don't even know what they're looking for, but they're looking for something.    There are as many reasons to consider as there are stars in the sky. 

Recently, a friend of mine invited me to Costa Rica to check out his development.   He's recently purchased 500 acres for future development and wanted me to check it out.  I was certainly excited for the opportunity.

Costa Rica has always been a draw for me for three main reasons:
1) stable government
2) great weather
3) cheap living conditions

Going into the trip, I created a list of objectives.   I wanted to find out the following:
1) ease of  access:  how easy is it to get to the property and get into the country, customs, flights, drive, etc.
2) safety: this is paramount.  If I'm going to get investors involved, I want to make sure they feel good about the experience, since many of them will want to visit the project.  And more importantly I want to personally feel good about making that trek and not worry about getting pickpocketed or mugged or worse, (like many other adjacent countries experience).
3) returns and demand: for the investment I want to make sure there are ample returns, beyond 20% so I can make it worth my while.   This is an investment and there is a hassle factor.  For good deals in the US we can typically make 20%, so there should be the same or better.  I need to get my investors 10-12% or more, so for me to get involved, it needs to be worth my while.
4) regional stability:  for the investment, I want to make sure the government isn't going to take the property back with some weird rule,  I want to make sure the market is appreciating and there is demand for the area and the property (so I can resell it if I want to).  We needs to be able to protect the investment (insurance) and also have unfettered access to the property (for instance, US Citizens won't be blocked from traveling to this port).

OK, so wrt Costa Rica.  Getting into the country was standard foreign travel.  Flight was good, on time, and not super expensive.  I was able to find a flight from Denver to Houston to Liberia.  The drive from the Liberia airport to my AirBnB condo was nice and short, just 20 minutes.  Overall of course, it all takes time to travel via airplane.  Get there 2 hours prior to departure, customs, and the car rental situation.  All told for just a "5 hour flight", with a 1 hour layover, it take 9-10 hours from door to door.  That isn't awful but certainly a decision factor.  Driving is CR is totally normal for small town type driving.  The roads are narrow, there are pedestrians everywhere, people on bikes and mopeds, and not a strict adherence to all the laws.   The locals drive crazy cutting you off and speeding around you if you're not driving like you stole it.   Driving on windy dirt roads and through rivers is also common in CR.  That's all a part of the fun adventure.  But access should be a priority.  Can you get to your property all year long, not just in the dry season?   My experience was normal for the most part.  Driving through rivers takes some getting used to, and I'd highly recommend anyone going to CR to get 4x4.   Rental vehicles are a hassle to get with hidden fees, the investment is usually its $150-200 a week.

Costa Rica is relatively safe from violent crime.  You certainly hear about the one-offs with someone getting killed or raped or worse, but it's not the norm.  However, petty theft is norm and burglaries are common outside of the gated communities.  It seems like every type of accommodation for a tourist has a guard house.   Security is big in Costa Rica and most of the places you'll stay will have a guard desk that you'll need to interact with.  This is good, but doesn't eliminate all crime.  If you are buying, ask about the crime. 

Demand for the project:  The most important question and the one that drives all decisions is the return on the project.  The greatest line I heard during my trip from my friend Micheal Simons was this:  We have dozens of buyers, not hundreds or thousands.    Wow.  That was the most profound thing I could have ever learned during my stay.  With only dozens of buyers, when you're competing with 100s of homes, what does that tell you about the market, and the potential?

Additional notes/thoughts:   Infrastructure is key for the potential investment in CR and water is the highest priority.  Water is life right?  If you don't have water, you can't do anything.   The strange/unique thing with CR is when you buy you don't have access to the natural resources (think mineral rights) under the property.  So you need to make sure there are water certificates (water letters) for your property.   Also, every contract (not just every real estate contract) needs to be written in Spanish, otherwise, it's not legal.   Have you heard the expression, location, location, location for real estate in America?  In CR it's water, security, views. 

Coming off my recent trip to Costa Rica, I feel like I have a very good grasp on what the advantages and disadvantages are for investing in Paradise

Monday, July 29, 2019

My Renter Midnight Moved? Now what?

In the cover of darkness, my tenants moved out of my Central Minnesota Rental, what are my responsibilities as a landlord?

If you've been a landlord for a few years, and had rental properties for more more than a few cycles of tenants, chances are you've experienced a midnight move.  Typically these tenants are running from something, and they don't tell you they're moving out, they just move out.   We call it midnight-move, but it doesn't have to be in the middle of the night.  Typically as landlords we're not driving by our properties every day, so it's easy to miss someone moving out.   Oftentimes the indication something is wrong is either from the power company calling you to let you know the power has been shut off (or reverted to your name), or a neighbor calls to let you know, or you just don't get rent that month.   It's critical you stay on top of your properties especially when pipes could freeze.  Lots of damage can be done in a short period of time.

What are the responsibilities of the landlord?  It's a good idea to have language in your lease about abandonment so you can get legal-access to the property, otherwise you might have to do an eviction to get access to the propety.  However, this little paragraph would work:
Abandonment: It shall be deemed a reasonable belief by the LANDLORD that an abandonment of the premises has occurred where the, rent has been unpaid for 14  consecutive days and the TENANT has been absent from unit for 24 hours.

So if they're late on rent, and gone for 24 hours, the place is mine. Change the locks and revert the utilities to my name and we can get someone new in there to pay the rent.  Otherwise, you may not have legal access to the property if the occupant is still the rightful occupant (even if they're late on rent).   Everyone deserves their due process. 

Monday, July 1, 2019

How to Buy A Home Using Seller Financing.

Once upon a time....

In 2001, I was relatively new to the real estate business.  I'd bought 5 houses and did it the wrong way.  I had put 10%-20% or 3% down on a few different houses that I bought, and all of a sudden I was property rich, and cash poor.   Sound familiar?    Raise your hand if you've ever been in this position.    Cash flow was nice, and the tax benefits were a bonus, but I was dead in my tracks because I thought the only way to buy was to get a new bank loan.   I was so wrong.   And then I learned the truth behind this quote:

“The mind, once stretched by a new idea, never returns to its original dimensions.” Ralph Waldo Emerson

A powerful method of buying real estate was introduced to me and that is through seller financing.  Seller financing is simply buying something where the seller acts like the bank.  And just like any bank or any transaction, there is a give and take - a negotiation if you will.  What I soon realized is there was absolutely no limit to the creativity of structuring an offer.  For example, the purchase price was no longer the sole and only determining factor in the house buying equation.  The terms became the focus, and the price of the home, the overall purchase price was just one of the terms.  If the seller could wait for some or all of their equity, there was no limit to what could be structured for the purchase.

It became obvious to me that the major terms of the transaction where purchase price and payback terms.  The payback terms were the focus because that is really where the money could be made or lost.  One time I structured a purchase were there were no payments due for the entire duration of the payback term.   The term was 2 years, and in that time, I fixed the house marketed it and sold it, paying off the seller once it was sold.   

Over the years, in meeting with different sellers and talking about objectives for both parties, it seems like there are 4 major terms of the transaction that can be negotiated:
1) purchase price 
2) length of payback (and balloon if any)
3) downpayment (if any)
4) monthly or periodic payment (if any).

The reason I love seller financing so much is because of the flexibility in solving the seller's main objectives.   Since there are 4 major moving parts  Oftentimes, sellers want the most they can for the property - the highest price - and I guarantee I can pay the most of anyone anytime anywhere, using seller financing.

This is pure capitalism, with buyer and seller working out the terms of the sale from a blank slate.  You can negotiate every nuisance of the transaction (usually falling under these 4 categories).  And I've found it to be a superior technique than paying all cash for something.    Incidentally, that's just one of the terms as well - ALL CASH is just one of the terms of a transaction; however, it does limit you with the direction you can go on some of the other aspects of the purchase.  For instance  you can't pay the most or highest price if you're paying all cash.  You'll need to get a discount because cash is expensive. 

Let's step into an example, let's take your proverbial $100,000 house that needs 10,000 in fix up.   Traditional all cash buyers would be trying to buy that for $50,000-55,000.   However, with seller financing, I can pay as much as $150,000 for that property and still make a nice profit.  It's all in those 4 terms above.   What if I paid $10 a day for 15,000 days?  Would that work?  That would $150,000 and my bet is that I could rent it for more than $300 a month, so my payment would be covered, and in 41 years I'd own it free and clear.     Does that work?   How about $1M for the $100,000 house?   Sure, I can pay $1 a day for a million days.  Does that work for you?

Monday, June 24, 2019

My Tenant Won't Leave, What Can I Do?

There are a few things you can do to get your tenant out of your rental property.   Assuming you have followed the advice of my previous blog, and filed the eviction now what?

Recently I had a tenant who threatened me (verbally) with gun violence.   Michael was his name, and he said something like "just try to come back to your house, we'll be waiting for you and we may have guns.". 


Dang.  What now?    I thought about going in there anyway - but really my life is worth more than whatever that house is worth.  I thought about buying a bulletproof vest, but what in the world?  I'm not law enforcement.    I thought about boarding up the house and securing the property, but that wouldn't solve my problem and ultimately I wanted to get the thing re-rented or sold.    I knew if I just changed the locks, they would damage the property getting inside.   That wouldn't solve my problem either. 

Thankfully I was able to find out what he needed.  I spoke to him like a human being and determined what his needs were.   They just needed time to move out some of their things.  Unfortunately, as is usually the case, they left a whole bunch of personal property including a piano.  So I get to move the things they don't want.  Great.   That's just part of the business. 

My advice is talk to them.  Find out what they need.  It was obvious they had moved out, but had some of their items there still with which they wanted to retrieve.   Just think, he was going to shoot me over some stuff, worth less than $1000.    What would you do?

Thank you, next. 

Monday, June 17, 2019

What is my Pine City home really worth?

No matter where your home is located, the process of valuation is always the same.  Appraisers, Buyers, Realtors, and Investors all use the same approach when it comes to determining value.  The value of the home is determined by what someone is willing to pay for it. 

In order to come up with that number, a few different approaches are used by appraisers.  Typically then an average of these methods are then used to come up with the value. 

COST APPROACH:   This takes building costs into account.  On average right now building costs are $120-150 depending on the finish work of the build out.   A higher end home costs more to build.  So the cost approach is sometimes used and factored in for resale value.  For instance 1000 sq foot home at $120/ft to build would be valued at $120,000

INCOME APPROACH:  This method takes the properties potential income for determining the value of the asset.  If it can rent for $1 a foot, for example a 1000 sq foot home can rent for $1000 a month, then you can take this gross income, subtract out the expenses to get NOI (net operating income) and divide this by the CAP rate for rental properties in that particular market.  CAP rates (also known as capitalization rate) are usually in the 6-7% range depending on the market, the property and the demand for that asset.    So assume in our 1000 sq ft example, gross income would be $12,000, and you can discount 30% for expenses (an estimate) to get to 70% of the gross for NOI = $8,400 then divide this by 7% for the CAP rate (assuming that's an accurate CAP), for a value of $120,000.

COMPARISON APPROACH:  This is pretty common to look at other comparable properties or comps to determine the value.   Of course one of the unique things about real estate is every property is slightly different, so the value of having a pond, or 2 acres vs. being on a busy road is all subjective.  Once you've looked at enough homes (over 100) and watched what they're selling for and tried to determine why, it gets easier.

So what is your Pine City Home Worth?  It's worth whatever a buyer will give you for it - that still holds true.   If you want a free home evaluation of value, call a realtor.   They may give you one.  We will give you an offer.  You can base our offer then and say 115% above that offer is the value.  Typically our offers are about 15% below what the value is for the market.  We're using 22 years of experience, to come up with that number.

Monday, June 10, 2019

How to Estimate Home Repairs in Zimmerman, MN

How Much Will My Bathroom Remodel Cost?

Today's contractors are busy, busy, busy.  Why?  Because there is a demand for skilled carpenters and good-reliable contractors.  Therefore, that drives the price up!  It's supply vs. demand. 

So before you invite your contractor out to your house, let's talk about the best way to get your remodel estimated.   The simplest way is go to hammerpoint.com and punch in the remodel that you need done.   It will help you.

A bathroom is going to be either $5000, $10,000 or $15,000 depending on the level of finish work.  I'm not sure if I've ever seen a $15,000 bathroom, but that may include some really high end finish work including maybe 2 showerheads and heated floors and all the fancy Italian marble for the vanity.   Most bathrooms are in the $5000 - $10,000 range.

Hammerpoint.com gives some good ideas and I've used that resource created by my friend Josh Cantwell to get ideas beyond the bathroom remodel.

Monday, June 3, 2019

How to find a House for Rent in Mora, MN

With the rental market so tight, and good rentals becoming harder and harder to find, renters are needing to look hard for their next place to live.   Here are 5 great ways to find your next rental property.

#1, look in the newspaper under the classifieds section.    Yes, there still are newspapers and they still have classified ads.  There are some real gems in the newspaper, and you can still find rentals in the paper.  If you need help, ask a retiree to show you where to look.   

#2, look on CraigsList.com and Facebook.com/marketplace .   These are the digital classified ads of the future, and most landlords list their homes for rent on these two venues. 

#3, look on Rentals.com and apartments.com and zillow.com.   Some property management companies and realtors utilize these sites to book places for rent.   They have good traffic and oftentimes you can find what you're looking for on these sites.

#4, Go right to the source and contact a property management company.  Don't know any of them?   Talk to realtors, b/c in most states you need to be licensed to run a property management company.  Connected realtors know who the property management companies are in town, and if your agent doesn't know, don't give up.  Swing a dead cat and find another realtor and ask them.    Most larger investment companies who are doing rentals don't management them themselves, they hire an agent to take care of the hassle. 

#5, Last but not least, contact an investment company like mine,  Lakes Area Home Investments, who has rentals.    Our company has managed 1000s of properties over the past 21 years and will probably have some in the future as well.