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.