Real Estate

I gave away the top real estate investing “secrets” yesterday and now I’ll tell you a simple reason why I don’t do it: It is too much work!

Having a full-time job, running a couple of blogs, and keeping a family in harmony is a lot of work. When I began looking into Real Estate Property as an investment (both commercial and residential) it quickly became obvious that it takes a great deal of time to conduct research, spend time with owners/lawyers/banks to negotiate deals and ultimately spend more time managing the property.

All this work is contrary to the Get Rich Slick way which is a two pronged approach to wealth independence.

  • Get Rich Slow using traditional methods of investing via 401k, Roth IRA, Traditional IRA, and Savings.
  • Get Rich Quick using speculative and aggressive investment strategies such as Covered Calls, Options, Stocks, Currencies, Bonds, and Commodities with the least amount of work and the highest possible return.

I ultimately ended up asking myself some fundamental questions such as, “Am I better off spending a few weeks or a month researching a property to buy or spending a few minutes researching an ETF REIT with high returns via dividends and covered calls?”

“Do I really want to tie up tens of thousands of dollars in Real Estate that may go up or remain flat for the next xx years?”

“Do I really want to become a part-time plumber, carpenter, electrician, HVAC repair man?”
I haven’t given up on Real Estate since I may ultimately convert my current home to a rental property but “flipping” or becoming a rental guru is ultimately too time consuming and not for me. I may end up with one or two rental properties but I wouldn’t go any further than that unless I can make it much easier on me.

No Money Down! Buy Cheap Foreclosures! Come to our Seminar!

I’ll save you the cost of the seminar and simply tell you what all the real estate “secrets” are that you will be taught in the class.

The “secret” to No Money Down

The No Money Down real estate purchase usually involves finding someone with an existing home and mortgage that is financially in trouble and likely to be in foreclosure. Most city/county governments will publish a foreclosure list at least 30 days before the foreclosure and you can usually pick up a foreclosure list at the local city/county office.

Once you find the list, you essentially start cold-calling or visiting the homes and speak with the owners and offer to purchase their home for a small amount usually $500-$1500. Note: This isn’t money down to a bank for a mortgage this is a fee you’re paying to the owner to “buy” his home and transfer title to you.

Why would someone take $500-$1500 for their home? You essentially explain to them that they are in foreclosure and they’ll get nothing for their home once it sells at the court house auction. By taking $500 to $1500 they are walking away with some money.

Once the title transfer takes place you simply send the mortgage payments (and any payments overdue) to the mortgage company. Voila! You have a No-Money-Down home/mortgage.

A variant on this strategy is to partner with a bank and get REO properties (properties foreclosed/bought back by bank) but this essentially involves creating relationships with banks and is often difficult to obtain given the fierce competition.

Next are homes that have been abandoned. These properties end up in tax foreclosure and a similar list can be obtained at your local tax assessors office. Laws vary by state but these are much trickier because the owner usually has a window to pay the overdue tax bill at which point the property must be returned to the tax offender. The cost of the home/property here is usually the amount of the tax bill overdue but often there may be a mortgage attached to the property as well.

Lastly, there are the foreclosure homes actually being auctioned off at the court house. By the time the property reaches here you know that:

  1. There was no one willing to convince the current owner to part with his home for a fee
  2. The bank opted to put the property for auction rather than buy it back to resell it
  3. The property may have issues if no one was willing to buy it before it went to auction
  4. The property will likely go for close to its net value because competition at the court house is fierce

Tomorrow, I’ll tell you why I haven’t invested in real estate properties despite knowing all the “secrets” to the magic formula.

Once again the Federal Reserve Chairman issued a warning about the looming crisis in the 78 million retiring boomers and once again, the issue has been glossed over by most of the media. Reading some of the quotes from Bernanke himself,

Unless Social Security and Medicare are revamped, the massive burden from retiring baby boomers will place major strains on the U.S. budget and economy, Federal Reserve Chairman Ben Bernanke said Wednesday.

And also,

As the population ages, the nation will have to choose among higher taxes, less non-entitlement spending by the government, a reduction in spending on entitlement programs, a sharply higher budget deficit or some combination thereof, Mr. Bernanke said.

All I can suggest to everyone at this point is to make some plans to invest in Real Estate somewhere outside the U.S. If you can afford to purchase a vacation/getaway home in the Caribbean, Central America (Costa Rica, Honduras, Panama, etc) or anywhere else it may prove to be the wisest investment you’ve ever made.

I told this to a friend recently and his response was, “well what if the government nationalizes your property or seizes it?” and my response was “well what if you have all your money tied up in your 401k and the US government taxes it at 70%?” or “what if the Dow collapses on the burden of heavy taxation?” Are you going to feel better that you lost all your money because you lost it in the United States?

I’m not suggesting you take ALL of your money and send it over to Panama; I’m suggesting you have a backup plan and an exit strategy if things become dire.

The one group in the entire United States that knows more about financial crisis and policy are the people that make and lend the money – THE FEDERAL RESERVE. The Fed has just repeated warnings that we heard from Greenspan for the last few years. It’s a big red flag that things aren’t looking too good here in the future. Of course, people live EVERYWHERE in the world and I have yet to read about anyone losing their property from outright seizure unless they were criminals or failed to pay their debts. Of course, common sense is you’ll avoid places in political turmoil but there are plenty of places to invest.

Don’t say you weren’t warned (repeatedly)!

Like most people, I have a mortage on my home and although it is currently at a very low interest rate (3.25% ARM), it will eventually adjust sometime next year. Unlike many other people, however, who might have difficulty with raising interest rates on an ARM, I won’t be one of them. I am close to accumulating enough cash to pay off my mortgage entirely but I’m contemplating what course of action to take.

I have several options when my ARM adjusts:

Option 1 – Accept the adjustment and pay the new (higher) interest rate.

Pros: At my current income level I am close to being phased out of ROTH IRA contributions along with most other tax deductions so a higher interest rate will actually increase my right offs and reduce my AGI to a point where I might be able to contribute to Roth accounts.

Cons: Not having any idea where interest rates will be in the future after the adjustment each year could leave me vulnerable to ever higher interest rates and create a disruption on my scheduled cash flow operations. There is a cap of 9% interest in a worst case scenario.

Option 2 – Pay off the mortgage with cash holdings

Pros: No more mortgage! No more interest expense! Freedom!

Cons: Paying off my mortgage will mean a large depletion of my accumulated cash holdings. Although the heavy burden of the mortgage will be off my back it may leave me vulnerable should something unexpected happen. I also worry about the possible destruction of my home and failure of insurance company to repay in extreme circumstances. I’d be left with literally nothing if my insurance company refused to pay (for whatever reason) or becomes insolvent after a major disaster. With existing cash holdings, I could easily move to a new city/state/country and start over if I needed.
Option 3 – Use 0% APR Credit Card Transfers to effectively eliminate large chunks of mortgage.

Pros: Zero percent mortgage is great. Exchanging a 100% secured asset for 100% unsecured debt is a no brainer. By shifting the burden from mortgage bank to credit card bank, I get to keep my cash holding to invest and earn higher returns while eliminating high variable interest debt on the mortgage. In a worst case scenario if I have to file for bankruptcy I’ll get to keep my house free and clear.

Cons: No tax deduction on interest (although there wouldn’t be any at 0% APR anyway). FICO? Not sure what adding tens of thousands of debt will do to my FICO but it can’t possibly be good. The really big issue is if the credit card companies pop the APR for various reasons (universal default clause, etc).

Option 4 – The Ultimate Real Estate Investment

And finally, I conclude by what I consider to be the Ultimate Real Estate Investment dream and it would effectively allow many Americans to become nearly self-sufficient and provide a high level of stability and security for themselves.

I could easily take money from my IRA and use those funds to pay off my mortage. Effectively, the IRA would become my bank or landlord and I would pay myself interest (or rent) at high enough levels to earn 10% return. I’ve calculated that if I loan myself my own money (100k) at 10% interest for 30 years, my ROI would be $1,983,739.94! Yup, nearly 2 million dollars using this type of transaction.

Of course the added benefits would be tremendous:

  1. I would own my home.
  2. In theory, I could right off the mortgage interest off my IRA loan although I’d happily give up this credit if I could do this.
  3. I would have a guaranteed stream of income for my retirement coming from myself. No one gets hurt if I fail to pay except me.
  4. If need be, I could sell the home at the end of 30 years and keep the profits from appreciation tax free.

Unfortunately, the IRS doesn’t allow you to do this with family members or with your own home. You could however arrange a “house swap” with a non-family member in which your investment partner would own your home and you own your partners. I’m told savvy real estate people do this with many of their partners but I’ve yet to tap into this network.

The more important question with this last scenario however is why the government doesn’t really allow you to do this? This scenario essentially frees every person to be the master of their own destiny. Perhaps that’s part of the reason why you can’t do it; Option 4 effectively eliminates the need for social government.

I welcome your comments.

Hello World!

This is an inaugural post- the day is May 2, 2006. I created this website in an effort to entertain and educate the sea of investors out there who thirst for a different perspective on investing and those who seek better insight into the financial world beyond the “Finance 101” blogs out there.

My goal: Grow my portfolio by 20% year over year.

My strategy: Use unique investment opportunities to grow my portfolio.

My Disclaimer: I intend to use varying strategies to achieve my goal. Some are high risk and may lead to the loss of capital should the investment sour. In no way shape or form should you construe my posts as advice on what you should do with your own money. Please perform your own due diligence and if necessary consult a financial professional to assist you with your investing strategy, aims and goals.