Renting vs Buying

March 9, 2009


Renting vs Buying

By
James Miller

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I saw this article on Yahoo about the benefits of Renting over buying a property. This fellow seems to make a broad statement that Renting is better. My take on this familiar argument is that it really depends on your situation.

1. It’s not apples to apples.
You can rent a decent two bedroom in the area where I live for anywhere from $600 to $750 per month.  A small, two bedroom house is going to set you back about $70,000 to $90,000.

Costs will be comparable on both.

But a house is not the same thing as living in an apartment.  Sure they are both “places to live”, but so is a cardboard box alongside the highway. You could argue pretty low living expenses for the cardboard box when compared to a house or apartment, but it’s a lot different.  Human taste and comfort comes into play. How much value do you put on not being packed into a building with other people? How much value on not dealing with a landlord or management company.
These intangibles make a difference too.

2. “Rent instead of Buy” pundits always make this mistake:

As Taken from the Yahoo Article:
“Houses looked like smart investments in 2007. They had returned 9.3% a year for a decade, while stocks had returned just 5.9%. This year, with investors fleeing both houses and stocks, both probably look like a waste of money.”

Sounds reasonable. Until you realize that the return on investment only makes sense if you buy your house all cash.  Since most of us don’t, you have to take into account the return on the amount you have in the house, which is usually the down payment plus some closing costs.  If we use numbers from his example and you are getting 9.3% on your $100,000 home, but only put 10% down You are getting an equity return of $9300, on a $10,000 investment, or about a 93% return.
Try that in the stock market.
I am sure it can be done…..under very speculative conditions.

3. The final thing to keep in mind is that too often people get more house then they need, and as of late can afford.  If you stick to a reasonably sized house for your needs, the payments are often comparable to renting, and the lifestyle is much more comfortable.

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The Art of Patience in Real Estate Investing

February 18, 2009


The Art of Patience in Real Estate Investing
by James Miller

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I have a friend who is working on buying his first property. Besides looking for his own personal residence, he wants it to be a good investment.  He is looking for a deal.

He is looking at a REO (Bank Owned) property that has been siting for a while. The condition was pretty rough, so the bank decided to put about $5000 into it to replace carpet and paint the place. A surprisingly good move on the banks part.

The fun part for me is that I see a lot of what I felt and did when I was looking for my firs investment property. I see his excitement and energy.  I also see how he is too close to the deal and starting to justify things.

Today he called me and told me that they are only off by $1400 in price, and that he is feeling a lot of temptation to call up the broker and tell him that he will accept the banks last offer.

I preempted my next statement by telling him that it really comes down to how badly he and his girlfriend want the property. Since they are also looking at if for a residence, there can be some emotion involved.  And I would hate to see him lose the property if he really wanted it.

As I had walked through the property for him, I then followed up with these two thoughts:

“It is a good deal, but not a great deal.”

And

“Banks are a lot more flexible than they let on.”

He had told me that the lender claimed that under no circumstances can they come down that extra $1400, they are already at their bottom dollar.

If this was an individual, I may be more inclined to believe it, but in reality nobody understands the time value of money more than a lender. They have to know that the longer they sit on a property, the more it is costing them.  When given the choice between a $1400 hit and waiting another six months before getting a seller, I have to believe that the bank will eventually cave in.

There is always the chance that my friend will miss out, that some other investor or individual will decide on buying the property at that price, but if you can position yourself so that you are ok with any outcome, you will always do all right.

Patience is the real key to buying, especially when starting out, where everything looks like a deal and you are so hungry to start investing , you can barely stand it.

Here are the basic steps to placing an offer on a property so that you can rest at night.

1) You need to quickly evaluate a property as best you can.
2) Set the price/ terms you are willing to buy it for
3) Negotiate to do better than the Price and terms
4) Be ok if you get an accepted offer, and willing to walk away if you don’t

I also noticed that my friend was commenting on how his Realtor was pretty close with him and he felt comfortable that he was looking out for his best interest.

He then later told me how the Realtor had commented that $1,400 was only going to be an extra X number of dollars per month on a payment.

This is a common technique that is used to sell. Taking a number that seems large and breaking it into terms that seem smaller. We have all heard some advertisement that talks about how something only costs “31 cents a day” or “less than your daily cup of coffee each morning”.  This technique is used to break down our barrier to a pricing objection, by making it seem to be an insignificant amount.

When I heard that the Realtor did that, I told him that he might want to be wary about whose side the Realtor was really on.

I can only imagine how the enticement of a commission in these slow times can be tempting, maybe even to the point of bending morals.


Why would any one want to be in Real Estate?

February 8, 2009


Why would anyone want to be in Real Estate?
by James Miller

This question is particularly pertinent right now.

Here are my top reasons for investing in Real Estate… especially now.

1) Real Estate is on sale.

Houses all over the country are selling at a discount from the sellers themselves, from the lenders, or even the US government.

2) I love the Write offs

Real estate allows me to depreciate about 3.3% of the value of the property the first year.  It is a declines after that amortized over 27.5 years. But this is a phantom loss that I can hold against my earned income. Sure I have to realize that deprecation when (or if ) I sell, but the dollar I can write off today is worth much more than the dollar I have to pay back in the future. this is the whole time value of money thing.

Since my real estate is set up as a business, there are plenty of write offs we get to take in our daily real estate routine.  Things like computers, printers and digital cameras are necessary for the work we do on our rental and rehab properties.  So are the tools I pick up at Home Depot, and many other things.

This is essentially a discount from what I would have to pay if I used these things for personal use.

I currently have so many write offs (and I am so underpaid at my current job) that I have not had to pay in income taxes in the past several years.

3)  I can get into a property cheap.

No other time in my investing career has it been so easy to buy a property from a seller with so little out of pocket.  I have literally had sellers pay me to take their house.  I have others where my net out of pocket was only a few hundred dollars and several more where the cash outlay were limited to just a few thousand dollars.

These are small sums that allow you to take control of an asset easily worth 100 times the amount you have into it.

4) Property appreciates in value.

No, I swear it really does. We have had a bumpy ride over the last few years, but when the fear is over and common sense comes back to the market, we will again see the slow steady rise in real estate values that we have been accustomed to over the past 100 years.

I am not saying that there won’t ever be bumps in the road again. I am just saying that what we have seen is an anomaly due to overzealous investing from abnormally easy loans.  Everybody got spanked.  We’re sorry and we promise not to let it happen again…. even though it eventually will.

5) Property provides cash flow.

I am making reference to rental property as rehab property can cost you money until you sell it.  I am in a particular pinch right now as I have three vacant homes we are in the process of selling that have created a net negative cash flow.

I took my eye off the cash flow ball and focused a bit too hard on the speculative rehab profit.  The market tanked and  I am in line with a lot of other investor and developers…. trying to sell ice to the Eskimos.

How can you learn from this lesson?  Always keep your eye on cash flow. As Billionaire Bill Bartmann says, the most important number in your business is the amount in the checking account. When that  goes to zero, everything stops.

If you always have a positive cash flow, your checking will never go empty.


Cash on Cash Return vs. Internal Rate of Return

February 2, 2009



Cash on Cash Return vs. Internal Rate of Return

by James Miller

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Cash on Cash
Cash in Cash return, or Return on Investment (ROI)  is the easiest Rate of return to calculate. It is also the one I use the most often as it tells me what the money is generating with regard to actual cash I can put in my pocket today.

To calculate it you take the amount you are getting from an investment, typically on an annual basis,  and divide it by the amount you have invested. Multiply this number By 100 and you have a percentage representing Cash on Cash Return.

For example if I have $10,000 in a property that is netting $100 per month, I am getting $1200 per year on my $10,000.

I divide the $1200 by $10,000 to get .12   I multiply this number by 100 to get my percentage of 12%

As you can see, cash on cash is a pretty simple and straightforward calculation. But what if we want to take into account the amount we are paying down on the loan each month, or the appreciation of the property?

Internal Rate of Return
Internal rate of return (Sometimes called Annual percentage yield) is the total true return on an investment taking into account depreciation, appreciation, and equity gained from paying down the debt.

It is much harder to calculate, as items such as depreciation depend on your taxable income. You also have to make some assumptions with regard to appreciation until a property is actually sold and that number is known.

This calculation is typically done over a holding period of 3 to 7 years. The period is usually fairly short since IRR typically decreases as time goes on.

If we take the example above assuming the following:

1) Home is worth $100,000.
2) I can depreciate 3% of its value the first year,
3) I am in a 35% tax bracket.
4) That property values have appreciates at 6% that year
5) I am paying down $100 per month toward the principal on my mortgage payment.

We get the following:

$1200   Cash on Cash return from above
$1050    Depreciation ($3000 Depreciation X 35% tax bracket)
$6000   Appreciation ($100,000 X 6%)
$1200   Principal Pay Down ($100 X 12 Months)
_______
$9,450   Total Internal Return

As a percentage:

$9450 first year IR divided by $10,000 initial investment = 94.5% IRR the first year.
Keep in mind that this is not spendable cash. Appreciation was our biggest number and it won’t be realized until we sell the home.

I have found that if I am doing well with regard to cash on cash return, my IRR Is going to be a better number. This assumes that there are no deferred maintenance issues and that I am not going to sell the property at a loss.


How to search for a property deal on Craigslist

February 2, 2009


How to search for a property deal on Craigslist

By
James Miller

Craigslist is great for searching for just about anything, but the problem Real Estate Investors face is that Craigslist is divided into Cities.  If I want to search for homes for sale I have to check four different cities in my area.

The tools:

I stumbled on a web site that allows you to search multiple cities at one time on Craigslist. This site is Craigshelper.com.

Besides searching for items on Craigslist, you are able to see what is availible on Ebay as well.  As of this writing it looks like there are plans for them to add functionality to the site so that you are able to search Kijiji and Backpage.

Craigshelper has a location for you to type in the zip code that you want to search around and a cool little slider you can use to specify the radius of the search.

As powerful as Craigshelper is there is another Craigslist tool called Ad Notifier for Craigslist that will alert you  the moment someone posts something on Craigslist that fits the criteria you have entered.  There is a video on the site that shows the software in use.

Here is a link to a screenshot of someone who has used it to search for anything with the word “free” in it.

You can even configure Ad Notifier for Craigslist to text your cel phone when a match is posted.

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Search terms are vital.

Instead of using generic terms like “homes for sale” or “ranch home” that focus on the properties,  I use search terms that locate the motivated sellers.

The follow search terms may be useful for finding people that need to sell their property:

“Motivated seller”

“will finance”, or “Owner will finance”

“seller will carry second” , or “Seller second available”

“Take over Payments”

“Owner Desperate”, You may get more than just property with this type of search.

“Homeowner must sell”

“house must go”

“All offers welcome”, or “considering all offers”

“will sell on terms”, or “terms available”

“will sell subject to”  although this is rare to find.

“OBO”, or “Or Best offer

“below appraised value”

“will sell for what I owe”, or “will sell for what is owed”

“Assumable”

“flexible seller” , or “Flexible terms”

“creative financing ok”

“please help”

“Lease Option”

“rent to own”

This is not an all inclusive list of terms to search for motivated sellers but will certainly get you started.


The first time I made $4800 in three weeks.

January 28, 2009


The first time I made $4800 in three weeks.

by James Miller

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We secured an accepted offer to purchase on a two bedroom one bath fixer upper located in Dodgeville Wisconsin for $50,100.  Our initial intention was to fix it up and rent it out.  We could have probably pulled around$600/mo. in rent from it.

My brother and I had talked about letting this deal go as the place needed some work and the cash flow would be close to a break even after the time and money we had to put into it getting it up to snuff for a tenant.

We instead found that we had locked into one of the most inexpensively priced houses in town.  Word had gotten around that we had a contract on the property and we learned from some Real Estate Agents that there were a few different people interested in properties in this price range.

We negotiated with one agent to work with his buyer to buy the place from us after we had closed on it.  Two weeks after we bought the house, we resold it for $57,000.00. We ended up netting $4843.87 in profit.

We let our bank in on what was going on and we were able to minimize a lot of the closing costs.

Here is how the deal went down:

We bought the property through a real estate agent on July 27th,  we went to the bank, put $9160 down as a down payment for a short term loan on it, got the title work done, got an appraisal, and purchased the property.

We immediately signed a contract with another agent to resell to his buyer for $57,000,  and closed with them on August 19th.

I thought we had found the Holy Grail of Real Estate Investing.

In just under three weeks we were able to get almost $5000 on a low priced deal by flipping a property…all without pounding a nail.

I know now that we could have done so much better.

Double closing comes to mind, so does assignment of contract.

(Here is a link to a good article by James Orr that discuses them both)

Here is an example of a recent deal my partner put together for us which illustrates what I am getting at:

My partner assigned a contract to an investor for a home on the river that has an approximate value of $110,000,  she had negotiated the seller down to $47,500, with terms of 1/2 up front and the balance in two years with no interest and no payments.

The assignment fee to the investor who bought this contract from us was $8,500.

Can you already see how this deal was so much better?

Just to get a few things out of the way before I discuss the finer points.

The assignment was done in late 2008, basically right now, when things are tight and “nobody” is buying.  The first deal was done in the summer of 2005 when everybody was buying.

The prices of the properties are relatively the same, $50,100 and $47,500.

We didn’t do any work to either property.

Here are the reasons that the assignment was a much better deal:

We made more money on the assignment than on the flip.

Here’s why:

1) There was more room in the deal….  About $55,000 more.

2) My partner was able to negotiate for great seller terms.  Making it easy for an investor to finance.

3)  There were no Real Estate Agents involved.  I really don’t have anything against Real Estate Agents, it is just that the more people yo uhave involved, the more times you have to slice the profit pie.

I also find that negotiating creative financing terms through most Real Estate Agents can be difficult, as people tend to say “no” to something they don’t understand.

We didn’t have to take any money out of our own pocket.

Well, except for a $10.00 earnest money deposit… But that is light years better than having to put don $9160.00 for a down payment like we did in the first deal.

It didn’t require our credit.

No bank loan on our part, so no credit needed.

In the first deal, we had actually purchased the property and held it while waiting for the second closing.  We were exposed to the fact that the second buyer could have walked away.

We did have a plan to rent the property out, if our buyer walked.  In that market we could have even spent a bit to throw on a coat of paint and resell the place to someone else, but we were tied to a mortgage and our credit was on the line.

In the second example all we had on the line was $10.00


There are only three ways to buy Real Estate

January 26, 2009


There are only three ways to buy Real Estate.


by James Miller


Yes there really are only three ways to buy Real Estate.

When you get started in Real Estate investing it can seem like there are hundreds of buying techniques you need to know.  In reality there are only three ways and every other method you think you know is just a variation of these three.

1) You pay the seller cash

2) You get terms from the seller.

3) You and the seller agree on some combination of cash and terms.

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Cash
You pay the seller cash.  It doesn’t have to be your cash, you can borrow if from a bank, a hard money lender or from an individual.  You can partner up with someone in either a debt or equity financing position.  You can borrow from your 401K.

It doesn’t matter where the cash comes from, it just means that the seller is getting completely paid off at the time of closing.

Cash is one of my least favorite ways to buy, unless I can use an all cash offer to drive the price down through the floor.  I am talking 30 cents on the dollar kind of thing.

Terms
You buy the property from the seller “subject to” the existing financing, by using a wrap around mortgage, land contract, or rent to own/lease option type purchase, or by having them carrying the whole first mortgage.

Most of these will require some small outlay of money, but in Real Estate terms I consider anything costing you under a few thousand to get into a property “no money”.

Terms means that the seller (or his lender) is not paid off when you take over the property, and that there isn’t any sort of significant down payment being transferred to the seller.

Terms from the seller is one of my favorite ways to buy property.

Combination of Terms and Cash
You pay the seller a portion of the purchase price in cash and they finance the rest for you in some way.  It could be that they carry back a first mortgage, a second mortgage,  use a land contract, lease option, wrap around or even “subject to”.

This is the most frequent way that I purchase property.  Sometimes I decide to catch up a mortgage in order to take over a property “subject to”. Other times the sellers want a down payment to feel comfortable carrying back a first mortgage on the property.

Buying property really is just this simple.  Don’t let the details of the multitudes of creative techniques confuse you.

It always comes down to one of these three ways.