Is it EVER okay to purchase real estate investments at full price?!?

Lee’s Notes: Good post from Vena Jones-Cox..

Is it Every OK to Pay Full Price for Real Estate?
Here’s an idea that’s gone out of fashion: building humongous wealth in real estate is a long-term process.

I know, I know…wholesaling, retailing, buying and selling creatively-they all hold the promise of quick cash. That’s why sales of courses and bootcamps on these topics will continue to outstrip those of courses on long-term buy-and-hold strategies by a margin of 100 to 1.

But let’s face it, not everyone is cut out to do the wheeling and dealing that these strategies require. Each and every one of them requires the investor to sift through dozens of potential leads to find the one deal where the seller is desperate enough to take 70 cents on the dollar for a quick sale, or is open to creative finance deals that are way outside of the average American’s frame of reference and comfort zone. In other words, the investor has to be both willing and able to negotiate a price and/or terms that make the deal work for him-and find a seller for whom the terms work as well.

Furthermore, depending on the strategy, the investor (let’s just call him “you” from now on) has to have the time (and in some cases, skills) to make the deal make money after the purchase. In the case of a retail deal, the low purchase price does not automatically equal a high profit-cost overruns, holding expenses, poor neighborhood selection, and unexpected repairs can quickly eat up any potential gain. In many creative buy/sell deals, as little as one month a year in vacancy can kill the profits for the entire year.

Now, don’t get me wrong-I am a big fan of (and practitioner of!) these short and medium-term deals. Like most full-time investors, I depend on them to take care of immediate cash needs, build money for long-term holds, and, frankly, to keep food on the table. But the source of my wealth-and that of every other real estate investor in the country-is the tax breaks, appreciation, and mortgage pay-down that comes from owning rental properties.

And what’s more, quick-turn deals just don’t fit into everyone’s lifestyle. Many people are just downright uncomfortable with the negotiation factor; others are unwilling or unable to commit the time it takes to deal with dozens of sellers for each property they buy; still others are in a tax situation that makes any type of short-term capital gain a major tax burden. And a mega-profitable quick-turn business requires a lot of volume-1,2, or even 10 deals a year aren’t going to make anyone a millionaire, especially since the profits are ultimately taken out in cash which, let’s face it, we tend to spend rather than grow into more profits. And doing more than 10 deals a year is difficult for anyone who plans to keep their “day job” for whatever reason.

So what if there was a way to become a millionaire in real estate without hard-ball negotiation, without a full-time commitment, and without making dozens of offers for each deal you buy? What if, in short, you want to be a completely hands-off, passive real estate investor?

There is-but in order to do it, you have to be willing to go against all of the training you have that says that smart investors don’t pay full price for properties. Oh, and you may have to consider investing outside of your own geographical region. Wanna hear about it anyway? Here goes.

When and Where to Consider Paying Full Price

First, some background for readers who live on certain parts of the east and west coast, Arizona, and Florida.

In most of the United States, it’s possible to purchase single and multi-family rental properties in decent areas for full price, pay 20% down or less, and still have positive cash flow at current interest rates.

This rule primarily applies to properties with an after-repaired value of 120% or less of the median house price in the area, and becomes MORE true as you move DOWN the scale. For instance, in Cincinnati, the median house price is around $125,000; a home with an ARV of $170,000 will rent for about $1400 a month and have positive cash flow if the mortgage is 80% of value, or $136,000

On the other hand, a home with an ARV of $70,000-which will be in an almost all-rental neighborhood-will rent for about $800 and will have a cash flow of $200 or so with $56,000 mortgage at 6 %.

A $50,000 property-which will be a high-demand rental, but almost certainly in a “border zone”, will rent for $700 a month and have a $300+ positive cash flow if mortgaged at 80% of value.

The trade-off, of course, is that the $170,000 will appreciate a LOT more and have a LOT more tax benefits than the $50,000. And needless to say, there are factors other than the mortgage payment that must be considered; in cities with very high property taxes or additional fees for garbage collection or landlord licensing, the numbers clearly change. But on the whole, here in flyover country, it’s possible to break even-or even make money-paying full price for a property and financing it conventionally.

So what’s so exciting about breaking even?

Well, not much-IF your goal is to live off the cash flow from the property today. But remember, for the vast majority of people looking at investment real estate, cash flow now is not as important as cash flow later, wealth-building, and, most importantly, ease.

Even full time investors like me aren’t generally looking to their rental properties for immediate income; instead, I’m looking at my rentals as a retirement fund that have no impact on my income right now, but have a major impact on my TAX situation right now. My income-the putting-the-food-on-the-table money-comes from my short term, highly taxable wholesale and lease/option deals. My wealth-the retiring-young-and-traveling-the-world money-comes from rentals. And in the meantime, I want to be able to focus my time and energy on my high-profit, quick-cash strategies, and have someone else worry about filling and managing my rental homes.

So in order to evaluate the REAL benefits of paying full price (or close to full price) for we have to look at the long-term impact of owning the property. And this means evaluating the tax implications (which affect your income immediately) and the growth implications (which affect your future) of owning rentals.

The Tax Benefits. The IRS allows owners of single family investment properties to “depreciate” the property over time. In other words, for tax purposes, the home is treated as if it were “wearing out” and decreasing in value each year, instead of growing in value.

Single family homes are depreciated over 27 1/2 years, and a conservative accountant will tell you to set a “basis” on your property of 80% of your purchase price. The resulting number is then deducted from your net income from the property. And if THAT number is a negative number-which it almost always is in the first 5 years you own the property-that “loss” can flow over and shield your ordinary income, as well.

A paper loss of $1,000 a year equates to a tax savings of $150 in a 15% tax bracket, $300 in a 30% tax bracket, and so on. Although the tax breaks are something most people think of only on April 15th, they are a real, quantifiable addition to your yearly income, and must be taken into account when looking at the overall profit from the property.

Long-term appreciation. Another benefit of owning properties for the long haul is the growth of value of the property over time. Although the appreciation in the last 3 years has been NEGATIVE, all this means is that by paying full price, you’re buying at or close to the bottom of the market, and are positioned to get the appreciation that will be driven by the recovery of house prices.

If you use 3% as an extremely conservative estimate of yearly appreciation, over the next 5 years, a house worth $150,000 today will be worth $168,000 in 5 years-an untaxable, unspendable, but very real profit of $18,000.

Equity Paydown. At the same time that the property is increasing in value, the loan amount is decreasing thanks to the efforts of the tenants to pay it off for me. As you know if you’ve ever looked at the amortization schedule of a 30 year loan, this takes place slowly at first and accelerates as time goes by.

Nonetheless, in our example of the $150,000 bought with 20% down at 6% interest, the tenant pays off $1,473 of my loan in the first year-another real, untaxable profit center. Of course, this number gets bigger each year as principal payoff accelerates, but even in the very first year, it affects your overall return.

So, sometimes, for some people, in some situations, paying full price for investment real estate is a smart move. But before you run out and do this, let’s talk about what it takes to make it work in the real world. No matter what your financial situation, do NOT contemplate this strategy unless:

The property is fully renovated when you buy it. Obviously, it doesn’t make sense to purchase a home for full retail price if it needs work to bring it up to full retail value. But it also doesn’t make sense to pay full retail less the actual rehab costs for properties that need repairs. The whole attraction of this technique is that it is relatively hands-off; if you’re going to do work to a property, you can and should be paid for the time, money, and energy you put into repairing it. And since the idea is that you’ll be paying close to full price anyway, it just makes sense to buy something that won’t need a roof, an electrical update, plumbing, etc. in the near future.

The property has at least break-even cash flow, NOT including the effects of appreciation, tax savings, and equity paydown. The only time it makes sense to buy rental properties that have significant negative cash flow is when the same property has very large appreciation potential-and expecting a property to appreciate 10-20% a year in today’s slowing market is speculation at its worst.

Incidentally, if you’ve never owned rental property, you may not be aware that “break even” cash flow, in the real world, means negative cash flow in some years and positive cash flow in other years, evening itself out over the long term. If you live in a market where it’s impossible to buy a decent house in a decent area with break even cash flow, you may have to consider buying a package of properties in another region of the country and having them managed to make this work for you. Remember, the idea here is long-term growth with minimal hassle, NOT to get rich in 5 years from high appreciation, and NOT to spend your own money “feeding” your rentals year after year after year.

You’re qualified for the financing that makes this work. In theory, when you buy a property that breaks even in year 1, it should be cash flowing by year 5 and cash flowing strongly by year 10 due to rent increases.

However, this scenario really only works with a fixed-rate, low interest loan. It’s a fact of life that our mortgage interest rates will be increasing in the foreseeable future, and it’s also the case the rent increases normally lag interest rate increases.

If you can’t put 20% down, or can’t qualify for a low fixed-rate 30 year loan, it just flat won’t work.

You can leave your money invested in the property. Since this entire scenario is based on long-term growth and mortgage paydown, it’s crucial that you have the ability MAKE a downpayment, and then LEAVE it in the property (I know, I know, there are gurus all over the U.S. who would be rolling over in their graves right now, were they dead). But if you refinance the property at any point to pull out cash, you’ll not only decrease your cash flow a that point in time, you’ll also set yourself back years in terms of the mortgage paydown. Investing this way is like buying stock-you should be in it for the long haul, or not at all.

You are absolutely certain that the property will be well-managed. The success of this strategy-both long-term and short-term-hinges on good management. Whether you plan to self-manage or hire a property manager, your razor-thin cash flow margins depend on keeping the property rented, keeping the tenants happy, and collecting every dime you’re owed.

The 20% expense allowance in the examples assumes that you DON’T put a tenant in your property that’s going to do major damage to your property, and that you DON’T lose out on months of rent each year through vacancy, non-collection of rent, or lengthy rehab periods between tenants. If you can’t run your rental business like a true business, hire a good, competent property manager who will.

A note: if you’re going to hire a manager, talk to your tax professional first to make sure you won’t be subject to passive loss limitations in your tax write-offs.

Buying rentals at full price certainly doesn’t give you the “rush” that some of the other strategies available in real estate do. But real estate is such an important part of every financial portfolio that if you aren’t ready or aren’t able to do what it takes to wheel and deal in the real estate world, it’s sure better than doing nothing at all. For the right people in the right situations, it’s the obvious alternative to waiting to start a real estate career.

Finding Lease Options in Realtor Listings! – Wendy Patton

Wendy Patton talks more about Buying and Selling Real Estate on Lease Options in Indy and elsewhere.  She isn’t trying to sell you guru abilities, she is actually teaching you.

She speaks about talking with Realtors in Indianapolis and elsewhere. How to qualify Realtor listings and educate Realtors about creative selling techniques in Indianapolis and elsewhere.

Over 35 minutes of class time boot legged(not really) from Wendy Pattons’ Buying and Selling Real Estate Boot Camp… People paid thousands of dollars for this bootcamp, and you are getting a taste of it for free!

If you are looking to invest in real estate in Indianapolis or elsewhere, this is some great info!

Wendy Patton Speaks About Lease Options, Contract for deed(land contract), and marketing for buyers and sellers!

Great interview with Wendy Patton talking about lease options, land contracts(contract for deed). Lots of creative ways to purchase and sell real estate in Indianapolis with little to no money down. Also talking about different ways to market for buyers and sellers.

Wendy Patton started out investing in real estate in 1985. She started out using credit cards, and quickly learned that wasn’t the way to go. She has since published 4 major books about real estate investing, and understands how to buy and sell property in Indy with no money down.

Child Tax Deductions you might be missing.

Lee’s notes: John Hyre is a tax attorney, accountant, investor. If you have a business(real estate investor,etc), then you might be missing out on tax deductions for your children.. Good way to fund college or start saving for their future. Have to check with an accountant, but you might be able to do this stuff if you are renting your home.

Keeping your tax bill low is a war of details. There is no magical silver bullet that holds the IRS at bay. Rather, the tax code lets us cut a little here and a little there. It’s all in the details. Such “details” include your children. There are lots of ways to use the little darlings (I use the term loosely and obviously am not referring to teenagers!) to cut your tax bill. This article will focus on how to hire minor children in your business.

Specifically: If you have children between the ages of 7 and 17 and have not hired them in your business, the government is getting far too much of your money. And you are cheating your children of a remarkable character-building opportunity. On the other hand, hiring the kids saves you money and provides them with some hands on education. Here’s how it works:

Let’s say you are in a 30% tax bracket. Your business makes $75,000 in net income. You want to spend $4,750 on one of the kids. If you take that amount out of the business and spend it, you will pay $1,425 in taxes, leaving $3,325 to spend.

Instead, you hire your child. Each child has a $4,750 standard deduction – meaning that they do not pay federal income taxes on the first $4,750 in income. So you pay the child $4,750. Your business deducts that amount. The child uses the standard deduction to shelter the income. Result: You save $1,425 in taxes. Common questions:

Do we pay social security taxes on that wage?

No, if your child is under 18 years old AND you pay them out of a sole proprietorship, partnership or most LLC’s. If you pay them out of a corporation or an LLC treated as a corporation, then they owe social security taxes.

Is there lots of paperwork?:

You have to file a Form 941 four times per year. That’s the form that the IRS uses to get employers to withhold income and social insecurity taxes. For a child, it’s easy – there will be no withholding, so enter lots of zeroes on the form.

You need to issue a W-2 after year end. Easy enough.

You need to track the child’s hours and activities to prove that they did the work and that the type of work was within their capacity. A consistently kept Excel spreadsheet or “dead tree” notebook will do nicely. Bear in mind that the Tax Court has permitted parents to employ children as young as 7 years old as long as the work and pay were reasonable. 7-year olds can certainly pick up debris, lick envelopes, place stamps and the like. Obviously, the older the child, the more they can do. The pay should be a bit less than you’d pay a third party.

Do the children get to do whatever they want with the money?

Heck no! The money goes into a bank account and gets spent on what you say, when you say. Clothes, tuition and toys are all valid options. Using it to fund Roth IRA’s or (better yet) Roth Educational Accounts (also known as “Coverdales”) is a very tax savvy way to go.

Any tax traps involved?

Yes. Make sure that the children do not account for more than 49% of their upkeep. If they pay for 50% or more of their total expenses, you lose them as an itemized deduction on your personal return (Meaning you’d lose @ $3,000 in deductions AND the $1,000 child tax credit – ouch!). Using a program like Quicken or Microsoft Money can help you track kids’ total expenses (including housing and food) to make sure that you do not cross the 50% line.

Also, this particular tax tactic involves paying the kids for services. Providing passive income (like rents and interest) to children under 14 normally results in negative tax consequences. Now there are ways to give kids over 13 passive types of income while cutting taxes in a serious way – but that’s a story for another article.

John Hyre is a tax attorney, accountant and real estate investor. All of his clients are real estate investors. For more information and an excellent real estate investment newsgroup, check out http://www.realestatetaxlaw.com.

Interesting Super Land Lord Tips

Lee’s Notes: I work with a lot of investors who are either flipping properties or renting properties.. Below is a list of super land lord tips I found.. Good stuff!

Super Landlord Tip 1: Include in your lease the following wording: “Resident agrees to pay Landlord a service charge of $25 if it is necessary to deliver a legal notice for any violation of the rental agreement to this address.”

Super Landlord Tip 2: Put together a list names and phone numbers of five or ten churches or agencies in your area who are willing to help residents unable to pay rent. Whenever you have a resident with a good track record of paying rent on time, but one month has a “legitimate” problem that is making it difficult to pay, give the tenant the list. They may be able to help out.

Super Landlord Tip 3: Whenever you sign on new residents, tell them you look forward to working with them for the next three years as one of your “preferred” customers. Let them know they will receive special service as a preferred customer, such as having their carpets cleaned every year. This will triple the lifespan of your average resident and keep good tenants longer.

Super Landlord Tip 4: Ask residents if they would like a ceiling fan, mini-blinds or a color television added to their rental for a small monthly fee. One out of four (or more) will probably say “yes.” You should recover your expense for the item within 3 to 6 months. From that point forward, the extra payment is extra profit. Plus, your tenant is happy.

Super Landlord Tip 5: Document everything!!  Make sure that every tenant or prospective tenant has a file with a log for notes.  Document everything you talked about during all of your conversations.  This can help you during ‘spur of the moment negotiations’.  Along with that, it can help you get to know them better by remembering specific facts about each.  The more you can remember and talk with them on a friendship level, the better your tenants will be.

You think we pay a lot in upfront costs for buying a home?!?!

Lee’s Notes: You think we pay a lot of upfront fees to buy a home? haha I found this article about “Renting” in japan… The renter paid close to 10k in up front costs in order to RENT an apartment….

I know of a 4 bedroom house that rents for $1400.00 per month, and they only want 1 months security deposit.. hehe

(SNIP)
My new apartment is a 2LDK, which means that it has two bedrooms, one bathroom and an all-purpose living room / dining room / kitchen. It is located in a high class part of Tokyo, though the rent is affordable since the building is fairly old.

Rent for one month is 170,000 yen (US$1500), which isn’t that terrible considering that I’m sharing the place with a good friend. However, before being handed the keys, we had to pay considerably more than this amount – in cash.

As a rule, all new renters also have to pay two month’s rent in advance, which is somewhat reasonable considering the percentage of defaulters in Japan.

On top of that, all new renters have to give another two month’s rent as a security deposit, which is refundable assuming there is no damage to the apartment.

Here is where things start to get a bit shocking…

On top of that, all new renters also have to give another two month’s rent as a gift to the landlord, which is not refundable under any circumstances. This money, which is known as reikin (礼金; key money) in Japanese, is a huge blow to the wallet.

On top of that, all new renters also have to give another month’s rent as a finder’s fee to the realtor, which is also not refundable under any circumstances. This money is considered to be a small price to pay given the competiveness of the Japanese real estate market.

To summarize, this means that my somewhat affordable apartment required an initial down payment of a whopping 1,190,000 yen or approximately US$10,000 in cash.

(/SNIP)

Original Article>>

What are my options if I owe to much on my home.

I see a lot of people who got caught up in the refinance craze. They owe way too much on their home. I end up having to turn them down on listing their home because it is not a win-win situation for both of us.. Sure I would get to put a sign in their yard and get the free advertising, but this really isnt doing the right thing by the client.

Here are some of the options available to people who owe to much but want out of their house. 

1) Put it on the market at the price that is going to net you the amounts you need. – Unfortunately, the odds are that you will be on the market for a while, and this will have a negative impact on your property.

2a) You could go for an option contract – Option contracts usually work on the principle of the person putting money down(ideally 10%) and then paying you a monthly fee for X years(ideally 1 year). Then at the end of the term, they come up with financing for the remainder of the loan. This is pretty much where you are their lender for the term until they can get better financing. 

2b) You agree to a sale price on the home and rent/lease them the house for 1-2 years. At the end of the 1-2 years they have to come up with financing to buy the home. You keep the rent/lease payments they made over the past 1-2 years, and they come up with a loan for the full amount at the end of the term. Good for them, because they will hopefully take advantage of the appreciation of the property. Good for you if at the end of the term they decide to go elsewhere, you get to reap the benefits of the appreciation and you hopefully got a bit of extra cash each month over the term. 

Side note: in both 2a and 2b, you could raise the rents and create a downpayment fund for the buyer. Say if you would normally lease for $1000 p/month. You increase the rent to $1200 p/mnth and at the end of the term you would give them the money back towards a downpayment(1 year = $2400, etc). You could keep the interest, and this helps people who could never build up a downpayment on their own.

2c) You rent the house out. This is the least favorable of the 3 options, because your tenants really have no interest in the home, nor do they have an investment in it.

Depending on where your home is, you may be able to apply for section 8 housing, which is a qualification where the govt guarantees rent for low income housing.  I am not versed in how section 8 works. You would need to go to the source to find out how section 8 works. I have heard a rumor that if the tenant causes damage to the house, then the govt will pay for repairs, but I dont know how true that rumor is.

3) Stay in the house and put as much money as is possible each month towards your principal.

4) Try and work a short sale with the bank, or go into foreclosure on the house – Unfortunately, This can hurt your credit rating for 3+ years depending on the lender.  Be aware, some lenders consider a short sale the same thing as a foreclosure.

As to what lenders think about renting/leasing: If you have a signed documented lease, most mortgage companies will consider that as income, and loan accordingly. The lender I spoke with stated that if you were renting/leasing the house then they would consider that when it came time to finance your next home.. Basically, they take 75% of the monthly payment you are collecting and put that against your first and second mortgage payments. So if 75% of what you are charging for rent is equal to what your existing first and second mortgage payments are, you would have nullified that payment out of your budget..

There is one caveat, and that is if you currently have a FHA or VA loan on your home, you would not be able to get another FHA or VA loan on the new home.. Hope that makes sense.

Hopefully the above info is helpful. Obviously each situation is different. You will need to analyze your own situation and come up with the best solution.

Property Leasing – True or False

I stole most of this article from another person, but it rings true.

1. A Fair Lease, per month, is 1% of the home’s value. This is generally TRUE. I have seen a trend towards 2 prices, one with yard maintenance and other items (pool, spa, etc.) and one without.

2a. Short term leases can be rented for more than a long-term lease. TRUE. Because the property owner has more risk of a vacant property, the market rewards the property with a higher monthly rental rate.

2b. Longer term leases can be rented for less than a short-term lease. TRUE. – Especially in the midwest, if you are in an off season(Nov-Feb), you might be able to work out a longer lease(15-18 month) so that your lease ends in a better month. It becomes a win-win for you and the client.

3. Getting your “price” is the most important item in leasing. FALSE. The most important item is finding a tenant who will pay on time and will treat your property properly. I feel that this is more important than any other factor when renting your property.

4. Always buy properties to rent in a good school district. TRUE. The home values will tend to rise faster or hold longer in a good school district.

5. You have to be a handyman to have Rental Properties. FALSE. With today’s Home Warranty programs, owners can purchase a Home Warranty and use these companies as their ”Mr. Fix-It”.

6. Adding NO SMOKING or NO PET clauses will severely restrict your home’s ability to rent. MAYBE. I understand the owner’s wanting to control the property and potential damage. Owners can restrict their leases in this manner although I would encourage an owner to approve pets on a case-by-case basis. Also, this might be a way to increase rents. People will pay more per month to keep the family pet with them.

7. An Owner can restrict property to “No Children” or by Age. FALSE. This is a violation of Federal Law; to my knowledge the lone exception to this is if the property “Seniors Only Community”.