Real Estate Expenses Are Business Expenses

Posted on February 26, 2012 | Leave a comment

[CREATIVE REAL ESTATE INVESTING GUIDE: CHAPTER 2B]

 

Continuing with our previous discussion of how to think like an investor, consider this scenario…

If you owned a flower shop or insurance agency and you needed to obtain office supplies, who would pay for the supplies? Would you pay for the office supplies out of your own pockets (without reimbursement from your business)?

An entrepreneur would make sure that the business pays for the office supplies… or at least reimburse him for the business expense. Many would say that any business owner who pays for business supplies out of pocket (without business reimbursement) is either running a money-losing business or operating the business poorly. Some would say that this business owner has no business being an entrepreneur.

The key issue here is that when you are an entrepreneur, your business should pay for its own expenses. If you want to put money into your business, that’s part of your capital investment; but the business expenses should be paid from the business’ funds. This approach takes on added importance, as well as provides additional benefits, when dealing with real estate.

Many beginning investors are overly sensitive about higher interest rates and prepayment penalties. Investors who want to buy multi-unit residential properties may qualify to buy them with less than the 25% down payment required by most programs. However, these lower down payment programs often entail higher interest rates, additional origination points and prepayment penalties.

But these are poorly considered complaints, when you consider that these expenses will not—or should not—come from the investor’s pockets. The higher interest rates mean higher monthly payments, but who is paying those monthly payments? The property is! The borrower-investor does not pay (or should not be paying) these expenses.

Please don’t misunderstand me. I’m not saying that you should accept higher rates when lower rates are available. But many would-be investors receive quite a sticker shock when they move into the investment and commercial mortgage arena.

You should try to negotiate the lowest possible interest rate, points and closing costs possible. But experienced investors learn to keep it in perspective. Your greater priority is to build a profitable real estate portfolio creatively and efficiently. You are also seeking to do so, if you’re relying on creative low- and no-down payment programs, by convincing someone else to carry much more of the risk.

With low down payment programs, you are effectively asking the lender or seller to carry more of the risk for the investment. Some lenders and sellers are willing to do so. But there’s a price.

Another perspective on this matter is that if you acquire the property with little money down and the property’s rental revenue pays for the monthly payments, how much does this real estate investment cost you? Monetarily, it should cost you as little as possible. Yes, your time will be involved, but the property—i.e., your business—should pay for its own expenses. Just in case you haven’t figured it out already, investing in real estate is exactly like buying and running your own business.

You’re not buying a home when you invest in real estate; you’re buying a investment.

 

Next Creative Real Estate Investing Guide Section:  Understanding Real Estate Expenses

 

About this Creative Real Estate Investing Guide

The Creative Investing Center’s Creative Real Estate Investing Guide is an in-depth property investment resource developed by the Creative Investing Center and serialized for public use. The real estate investing tactics, strategies and principles discussed in this guide have been gleamed from our own decades of experiences in the real estate and mortgage loan world. If you would like to cite any portion of this real estate investing guide for non-profit use, we would be honored and simply request a citation link.

Please don’t forget to subscribe to our RSS feed to receive our upcoming blog posts. More importantly, because real estate investing continues to evolve, we encourage and invite any comments, corrections or questions you may have in the comment section below.

 

→ Leave a comment

Posted in Commercial Properties, Mortgage Loans, Property Management, Real Estate Financing, Real Estate Investing, Real Estate Investing Guide, Residential Properties

The Main Ingredient for Successful Real Estate Investing

Posted on August 18, 2008 | Leave a comment

[CREATIVE REAL ESTATE INVESTING GUIDE: CHAPTER 2A]

 

In the previous chapter, I teasingly only revealed one of the two main ingredients for successful real estate investing. In case you forgot, it was “knowledge.” Now I reveal the second — though probably more important — ingredient.

In fact, I believe that it is so important that if you can only dedicate yourself to carefully digesting one chapter in this entire guide, this is the chapter. If you can later re-read only one chapter in this entire guide, spend the time on this blog post.

Many people dream about building wealth through successful real estate investing. Many take the plunge and use their savings to buy investment real estate. Few succeed in their bigger goals of building great wealth, because most beginning real estate investors are not prepared to invest in real estate.

This lack of preparation is not about lack of research, study or preparation. It is about lack of knowledge about the main ingredient of successful real estate investing.

I’ve worked with many successful real estate investors who did not have a strong understanding of real estate investing tools and resources. But it didn’t matter, because they gained those tools and resources along the way and because they had that basic ingredient, from the very beginning.

You can spend a year in your local public library and buy every real estate guide sold by Barnes & Noble and Amazon.com (as I originally did), but chances are that you’ll rarely hear any mention about this key ingredient.

This main ingredient is learning to think like an investor.

Most beginning real estate investors do not think and act like investors. They may think they do, but most don’t. Instead, most beginning investors approach real estate investing like homebuying.

This is a big problem for beginning investors. Yes, home buying and real estate investing both entail real estate. They often entail the same type of real estate. But they are two different projects, which entail two very different approaches to success. The analogy is similar to the gardener growing vegetables in his backyard for personal consumption as opposed to the farmer growing produce on 2,000 acres for her livelihood.

For example, many homeowners and investors (using homebuyer mentality while investing) want to pay off their mortgage debts as quickly as possible. That’s okay for homeowners. But from a purely financial point of view, prepaying your mortgage is generally a bad idea—especially if your objective is a large appreciation profit.

This may seem counter to a lot of conventional wisdom among homeowners, but it’s true. Think about it. By prepaying, you make payments today to avoid making payments 25 to 30 years from now. You’re using today’s money (which is worth more) to save on future debts (which are worth less). Yes, you avoid interest; but home mortgage interest is tax-deductible and, because of (direct and indirect) government support, relatively low.

The benefit of mortgage prepayment, for homeowners, is emotional and psychological. The sense of security that comes from having a fully paid home when you retire is a wonderful thing. But emotional luxuries should play little if any role when considering investment properties. The bottom line must be the bottom line.

Some people are born with this investor attitude; some are raised to develop such an outlook. Many others are lucky enough to have the opportunity to learn it. I was not born with it, though I did pick up bits and pieces of this attitude as I grew up. I had to learn most of the attitude I now have the hard way. Although luck does play a part in successful real estate investing, it is this investor attitude, this capitalist approach that improves your odds for long-term wealth.

 

Next Creative Real Estate Investing Guide Section:  Real Estate Expenses are Business Expenses

 

About this Creative Real Estate Investing Guide

The Creative Investing Center’s Creative Real Estate Investing Guide is an in-depth property investment resource developed by the Creative Investing Center and serialized for public use. The real estate investing tactics, strategies and principles discussed in this guide have been gleamed from our own decades of experiences in the real estate and mortgage loan world. If you would like to cite any portion of this real estate investing guide for non-profit use, we would be honored and simply request a citation link.

Please don’t forget to subscribe to our RSS feed to receive our upcoming blog posts. More importantly, because real estate investing continues to evolve, we encourage and invite any comments, corrections or questions you may have in the comment section below.

 

→ Leave a comment

Posted in Mortgage Loans, Property Management, Real Estate Investing, Real Estate Investing Guide

Using Creative Real Estate Investing to Diversify Your Portfolio

Posted on July 5, 2008 | Leave a comment

[CREATIVE REAL ESTATE INVESTING GUIDE: CHAPTER 1C]

 

In the past, I’ve used the following example to begin discussions about using creative real estate investing to diversify one’s investment portfolio…

Amanda wants to invest in real estate. She has taken several real estate classes online and at her community college. She has about $50,000 in an individual retirement account (IRA) and has worked to improve her credit scores.

She feels she is now ready, but her stock broker is adamant in advising her against using her IRA or savings to buy investment real estate. After some research, her stock broker directs her to a real estate investment adviser that specializes in helping beginning investors with low-down payment investing tactics. This lender analyzes Amanda’s qualifications and helps her establish a game plan.

Their first move is to arrange for a home equity line of credit against Amanda’s home. This is a safety net. If Amanda needs emergency funds or money for a down payment, she can tap into this credit line. She only pays interest on the balance she maintains on this credit line. If she never uses it, she never has to worry about any charges. Plus, at today’s current rates, it’s hard to pass up.

They then arrange for low-down payment financing to allow her to purchase her first investment: a small, under-priced duplex that needs a little work. She uses her credit line to pay for the small down payment, as well as minor upgrades and soon has two tenants renting out the two units in the building.

Her interest rate and loan payments are slightly higher because she put no money down, but the rent payments are sufficient to cover the payments. After a year or two, she is able to refinance the investment property and use its higher appraisal value to lower the interest rates further and bring down the monthly payments.

During this refinance, she also pulls some cash out of the investment property loan to pay off the credit line balance on her home. She then sets her eyes on her next project.

This is just one way to creatively finance your real estate investments. The remaining chapters of this guide will review many more.

Through creative financing, you can minimize your out-of-pocket expenses. You would then be completely financing your purchase of real estate. With smart planning and careful investing, the selected real estate will self-liquidate its liabilities.

Many beginning real estate investors lose money. Those investors who do succeed sometimes have a little luck on their side, but they all tend to have a common trait: knowledge.

One of the two biggest obstacles to successful real estate investing for the average consumer has always been and continues to be knowledge—specifically, knowledge of alternative financing resources and knowledge of tactics for maintaining positive cash flow. I suppose this obstacle is the same for all investors with all potential investments.

What’s the second biggest obstacle? We’ll introduce that in the next chapter.

You will quickly discover that most banks are too conservative to work freely with new investors. They reserve their most aggressive programs, if they even have any, for proven clients and large-scale investors. If you already own a business running several million dollars through the local bank, you can be sure that the bank will not think twice about lending you the most aggressive mortgage loans under the most favorable terms.

But if you’re a beginning investor, chances are that you won’t have such opportunities. At least, not yet anyway.

Nevertheless, you will always have alternatives and options. The goal of this guide is to give you knowledge of the alternatives as well as of important basics. It is knowledge gathered from almost three decades in the mortgage and real estate industry. It is knowledge that you can apply almost everywhere.

This is a guide for beginners and novices. It also focuses on the property of choice for beginning investors: small (one- to four-unit) residential rentals. We all have to learn to crawl before we can walk. Fortunately, it’s an easy learning curve.

Nevertheless, many of the same principles apply for commercial properties as well. But more advanced investors and developers dealing with multi-million-dollar commercial projects will need to rely on more detailed analysis and calculation tools that often require MBAs. But that’s another guide…

Although real estate investing offers many opportunities, the environment is also rife with misconceptions, myths and hucksters. Those misconceptions and myths can lead inexperienced or unlucky investors into money-losing investments. Worse yet, there are many scammers and untrustworthy characters taking advantage of people’s dreams.

The good news is that creative financing options are available for practically all would-be investors. The first task, however, is identifying these myths and abandoning them in favor of the truth.

As in many things in life, the truth will set you free!

 

Next Creative Real Estate Investing Guide Section:  The Main Ingredient for Successful Real Estate Investing

 

About this Creative Real Estate Investing Guide

The Creative Investing Center’s Creative Real Estate Investing Guide is an in-depth property investment resource developed by the Creative Investing Center and serialized for public use. The real estate investing tactics, strategies and principles discussed in this guide have been gleamed from our own decades of experiences in the real estate and mortgage loan world. If you would like to cite any portion of this real estate investing guide for non-profit use, we would be honored and simply request a citation link.

Please don’t forget to subscribe to our RSS feed to receive our upcoming blog posts. More importantly, because real estate investing continues to evolve, we encourage and invite any comments, corrections or questions you may have in the comment section below.

 

→ Leave a comment

Posted in Commercial Properties, Mortgage Loans, Real Estate Financing, Real Estate Investing, Real Estate Investing Guide

Debunking the Myths in Real Estate Investing

Posted on June 12, 2008 | Leave a comment

[CREATIVE REAL ESTATE INVESTING GUIDE: CHAPTER 1B]

 

After criticizing all those so-called real estate gurus in preceding section, let me say that I do believe that real estate is the great economic equalizer in America. Real estate is probably the best way for the average person to build wealth quickly. In fact, for the average consumer, real estate investing is a much more practical path to building wealth.

Armed with a good credit grade and a steady blue-collar job, each year, the average homeowner can probably buy either $200 worth of stocks or a couple of $200,000 rental buildings.

But wait! There’s one error in that statement.

It’s not necessarily a matter of one or the other. The smart investor could and should do both: buy the $200 worth of stocks (or bonds) and acquire real estate. The wisdom of having a diversified portfolio has stood the test of time.

But it’s not that easy. Most would-be investors face an array of obstacles and challenges. The first of these hurdles is setting aside many of the myths and misconceptions plaguing beginning investors.

  • Misconception #1 – It’s easy to make money in real estate. It may be easier (comparatively speaking) in some instances, but real estate investing is still demanding. Not all properties will make money for all investment strategies. It also takes a great deal of homework and due diligence to find good investment properties. Unfortunately, just as in the stock market, real estate brokers and advisors are often more concerned with closing a deal—any deal—so that they can get their commission.
  • Misconception #2 – Over the long run, stocks will provide higher returns. It’s somewhat true that the stock market has performed well over the long run, but this is not an argument against real estate. First of all, the “long-run” for the stock market is less than two centuries, while the proven value of real estate began millennia ago. Also, the stocks often referred to as long-term winners are Dow blue chips or index leaders, who make up a tiny minority of the available stocks. How many of the corporations listed on the New York Stock Exchange (and on the Dow Jones index) in 1920 are still around today? Then you add the fact that there are new stocks entering the market every year, providing a theoretically infinite supply. The right stocks do perform very well — but which ones? On the other hand, land is a relatively limited supply that doesn’t move away and which faces continually increasing demand.
  • Misconception #3 – Real estate investing requires more work. There’s some truth to that, but the argument belies a lack of knowledge about the investment potential of real estate and the resources available to serious investors. The fact is that investing in stocks for long-term success also requires work—or payments to a “trusted” broker or advisor to do the necessary work. Real estate is similar in that preparation and planning is required to work smart, not to work harder. But real estate offers investors more control than do stocks and bonds. You directly hire and fire the managers and agents. You exercise great power over the health of your company. That’s not a realistic option if you’re securities investor.

This guide intends to provide beginning investors with the tools to get through those hurdles and challenges, which routinely blocks the vast majority of would-be investors. All of these tools are often lumped into the category of creative financing. Creative financing is synonymous with opportunity, especially for beginning and ambitious investors. Creative financing and real estate investing are both also rewarding and—dare I say it—fun.

There are many more myths and misconceptions floating around in the real estate industry, or at least among would-be real estate investors. All of these myths are based on a kernel of truth, but are twisted by both naïve pipe dreams and untrustworthy hucksters. This guide will seek to expose some of these myths and replace them with more realistic strategies for succeeding in real estate investing.

Please don’t get me wrong about the securities industry. I do believe that there are many worthwhile investments in the stock and bond market. In fact, I’m a big believer in taking advantage of 401K employer contribution matching and using such vehicles to build up a retirement nest egg.

I also believe that it is possible to build wealth in that arena. But you need a lot of money, time and patience to even get started. Real estate offers better options, without sacrificing your securities investments. Again, I recommend that real estate investors diversity with other investments — and vice versa. If you’re going to invest in real estate, you should also invest in stocks and bonds!

 

Next Creative Real Estate Investing Guide Section:  Using Creative Real Estate Investing to Diversify Your Portfolio

 

About this Creative Real Estate Investing Guide

The Creative Investing Center’s Creative Real Estate Investing Guide is an in-depth property investment resource developed by the Creative Investing Center and serialized for public use. The real estate investing tactics, strategies and principles discussed in this guide have been gleamed from our own decades of experiences in the real estate and mortgage loan world. If you would like to cite any portion of this real estate investing guide for non-profit use, we would be honored and simply request a citation link.

Please don’t forget to subscribe to our RSS feed to receive our upcoming blog posts. More importantly, because real estate investing continues to evolve, we encourage and invite any comments, corrections or questions you may have in the comment section below.

 

→ Leave a comment

Posted in Property Management, Real Estate Investing, Real Estate Investing Guide

Get Real About Real Estate Investing

Posted on May 25, 2008 | Leave a comment

[Creative Real Estate Investing Guide: Chapter 1A]

 

As this first chapter’s title implies, the first step for beginning investors is to put aside the myths and scams that surround real estate investing.

If you’ve seen one of those ubiquitous infomercials about getting rich overnight through real estate with nothing down and wondered if they were too good to be true, you’re right.

My problem with these supposed experts is not that they’re necessarily lying, although most of them are filled with half-truths and nonsense. It’s that they don’t tell the whole truth.

It’s easy to understand why. They’re not in the business to help customers become successful investors. They’re in the business to sell guides, CDs and workshops. They make it seem easy for a reason. How else would they be able to sell their guides, CDs, DVDs and $5,000 seminars? Does it matter to them whether you succeed or not? It’s not as if they will air your complaints on their infomercials. You may notice that many infomercials now use small print to disclose that those supposed testimonials are, in fact, the uncommon experiences.

Would you pay $5,000 for a workshop if they told you upfront that only one out every ten attendees will succeed in successfully investing in real estate with nothing down? Would you bother giving your credit card number to a program seller if you knew that only one out 100 subscribers, at best, will be able to quit their jobs and focus completely on real estate investing?

If I haven’t been clear, let me state it emphatically. Don’t waste your money on these infomercial programs! If you’re enticed by their products, I recommend you use eBay or some other online auction site to buy their guides, DVDs and CDs for pennies on the dollars.

More cynical readers—at least more cynical than me—would be correct to point out that I’m selling this guide. That’s a good point, but I hope that after you read further, you will quickly realize that this guide is different.

My partners and I used these same programs to acquire investment real estate for ourselves, with little or nothing down. I don’t claim to be spectacular at real estate investing. But I do believe in being well-informed, honest and trustworthy. I also believe that those same three characteristics are necessary to becoming a successful real estate investor over the long term.

So how do you avoid losing your money to scams and marketing schemes? The following are typical signs of a suspicious program:

  • Overnight success! Real estate investing success doesn’t happen overnight. It’s a long process that takes hard work, continued learning and a little luck. This is probably the quickest red flag to spot.
  • Lifestyle change! This is an age-old ploy for many marketers and the biggest red flag for beginning investors. Play on a consumer’s self-doubt and insecurities by promising a change in lifestyle. They show themselves in large mansions and beautiful yachts, surrounded by beautiful young women. If that is even their life, they got it from the sale of their products, not their real estate investments.
  • Creative financing is easy! Standard financing is difficult. Creative financing is even more so. When we peel back the hype and look at what’s involved in creative real estate financing, we quickly see that creative financing often requires the right seller, the right property and the right resources. It’s very difficult to line up everything so that it works and make sense for you. It’s not impossible, but your chances for success improve the more you are grounded in reality.
  • Absolutely no money required! Some money is always required. Even if you arrange a full zero-down acquisition, you will still need to find money for the out-of-pocket. It’s also not a good idea to go into any project without any reserves. Surprises are always in store for beginning investors. Living hand to mouth will quickly jeopardize all of your plans unless you have reserves to take care of inevitable emergencies and obstacles.
  • Plenty of properties just waiting for you! Unless you are targeting a depressed area, finding decent investment property is difficult. This is particularly true if you plan on investing with creative financing or zero down. As discussed later, the reality is that less than 5% of for-sale residential properties make sense for most investors. So-called gurus who fail to reveal this crucial item are either ignorant of or intentionally trying to cover up this fact.
  • Everybody can and should do it! Although the Constitution guarantees our rights to equal opportunity, it doesn’t guarantee equal ability or capability. Some people just aren’t cut out to be entrepreneurs or real estate investors right now, if ever. Sometimes, it’s because they don’t have the desire. Often, it’s because they don’t have attitude and knowledge. As we’ll continue to assert in later chapters, real estate investing is exactly like buying and running your own business.
  • One guide or workshop will provide everything you need to succeed! Even an ambitious guide such as this guide can’t make such a promise. All real estate investors need assistance. Beginning investors need trustworthy guidance to avoid the many pitfalls that are part of the process. As we’ll discuss in the “Where to Shop for Target Properties” chapter, real estate investment clubs and coaches are necessary if you plan to make serious real estate investments.

 

There are many more warning signs for beginning investors who are considering investing large sums in a program or workshop. The best way to avoid wasting your money and time is to invest in your own education.

As we recommend in later chapters, beginning investors should check with their local community college about courses related to real estate and entrepreneurship. Successful real estate investing will require sound money management and continual learning. It also requires a bit of skepticism and common sense.

 

Next Creative Real Estate Investing Guide Section:  Debunking the Myths in Real Estate Investing

 

About this Creative Real Estate Investing Guide

The Creative Investing Center’s Creative Real Estate Investing Guide is an in-depth property investment resource developed by the Creative Investing Center and serialized for public use. The real estate investing tactics, strategies and principles discussed in this guide have been gleamed from our own decades of experiences in the real estate and mortgage loan world. If you would like to cite any portion of this real estate investing guide for non-profit use, we would be honored and simply request a citation link.

Please don’t forget to subscribe to our RSS feed to receive our upcoming blog posts. More importantly, because real estate investing continues to evolve, we encourage and invite any comments, corrections or questions you may have in the comment section below.

 

→ Leave a comment

Posted in Property Management, Real Estate Investing, Real Estate Investing Guide

Creative Real Estate Investing Guide

Posted on April 21, 2008 | Leave a comment

Introduction

 

This creative real estate investing guide was created for the intelligent investor — or someone who wants to be an intelligent and successful real estate investor.

Unlike almost every other real estate investing guide, this guide doesn’t spend much time telling you why you should invest in real estate. That can and will be done in a few short paragraphs. Rather, this guide is intended to show you how to invest in real estate.

Equally important is that it shows you how not to invest in real estate.

My first experience with real estate investing came when I was only a senior in high school. My father had co-signed on a friend’s building. Unfortunately, that friend was unable to keep up with payments and the loan went into default and foreclosure. In order to salvage his credit, my dad stepped in and arranged a second-chance refinance with the lender. He then gave me the keys to the now-vacant building and told me that it was now my responsibility. He had no experience with or time for real estate, so that became my job.

Because cash was tight, I had to do all the necessary rehab and upgrade. It wasn’t too bad until the sewer backed up in the middle of summer. The plumbers said that they had to access the pipes below the basement slab and quoted me about $1,500 for the work — quite a lot of money back in 1983. Half of that amount was to break through the concrete floor.

It had to be done. But to save money, I decided to rent a jackhammer for $75 and break through the concrete slab myself.

Halfway through that muggy July day, my body was sore, drenched with sweat and covered with dirt; and I remember thinking to myself: “I hate real estate”!

Eventually, I did grow to appreciate real estate investing and wanted to learn as much as I could about its creative aspects. I also developed a niche providing creative financing for local beginning investors and teaching mortgage loan officers how to assist beginning investors.

I’ve spent thousands of dollars over the past two decades paying for guides, CDs and workshops, in my search for more knowledge about real estate investing. Inevitably, I had to do it the old-fashioned way: I learned as I went along. I have no regrets because I’ve learned from my mistakes and successes.

Through this guide, you should be able to learn from my mistakes and successes as well.

 

Next Creative Real Estate Investing Guide Section:  Get Real About Real Estate Investing

 

About this Creative Real Estate Investing Guide

The Creative Investing Center’s Creative Real Estate Investing Guide is an in-depth property investment resource developed by the Creative Investing Center and serialized for public use. The real estate investing tactics, strategies and principles discussed in this guide have been gleamed from our own decades of experiences in the real estate and mortgage loan world. If you would like to cite any portion of this real estate investing guide for non-profit use, we would be honored and simply request a citation link.

Please don’t forget to subscribe to our RSS feed to receive our upcoming blog posts. More importantly, because real estate investing continues to evolve, we encourage and invite any comments, corrections or questions you may have in the comment section below.

 

→ Leave a comment

Posted in Commercial Properties, Mortgage Loans, Property Management, Real Estate Financing, Real Estate Investing, Real Estate Investing Guide, Residential Properties