Intro to Real Estate Investing

In upcoming articles we are going to look at how to profitably invest in real estate of many kinds, starting with the old fix and flip. Stay tuned in coming weeks if you would like to enter that business or simply add some solid real estate holdings to your wealth portfolio.
My first love is real estate investment because it took me to levels that I could not have achieved without getting to be an expert in that arena. Before I bought my first property I was in college for two years and before that I was a juvenile delinquent and high school failure.

sold house

Your life can change in 30 minutes

My second year in college my grades were respectable. I was not winning any awards but I was doing far better than I had ever done in high school. The main reason was a reality check from my mom who told me in no uncertain terms that if I received the same grades in college as I received in high school that she would be cutting me off from my education funding. I couldn’t blame her as who wants to waste big money on someone who is not taking it seriously? Even though my grades were fine I hated every second of my two year college career.

Then late one night I watched an infomercial (brand new marketing strategy in the late 80’s that has now become common place) and it was talking about buying properties with no money, no job, or no credit. I had all of those so I figured I could make it happen. After some research and investing in that home study program I decided my second year at college would be my last. I jumped into the real estate investment business full time and eventually would also be a loan originator and real estate agent, in addition to an investor.

I found out that you could indeed buy properties starting with nothing if you had some cutting edge knowledge. I spent years and tens of thousands of dollars acquiring that education through books, tapes, and live seminars plus the real life education I learned on the streets.  I want to pass that real world information to you as much as possible in these next articles and in my book Wealth Without Stocks or Mutual Funds.

I then went on to train people all over the country in multi-day seminars where people spent thousands of dollars to attend these weekend events. I really love teaching people the power of real estate and how it changed my life. I obviously don’t have time or room to put all of those trainings into this article or the upcoming articles but I am going to load them with top notch real world information that you can put to use right away in your own life.

Who knew there were TV shows in flipping houses?

My young son loves to torture me with Real Estate “Reality Shows” because for some reason he is fascinated by the housing business. This will likely change as he gets older but if he wants to go into that field he sure was born into the right house! I am going to write these articles as if I was gone and trying to teach my sons the down and dirty of how to make money by fast turning or “flipping” houses. If they do what they learn on those “reality” shows they will certainly go bankrupt quickly.

Reality shows meet true Reality

I rarely watch these shows but when I do it becomes obvious they have little to do with the actual business of real estate investing and much more to do with drama and before and after photos. By the way, there is nothing wrong with this drama because people are tuning in to be entertained and not to be educated. The only problem is when people don’t know the difference and believe the televisions show is actual how to education. So let’s cut out the drama and get down to making real money.

Big paychecks are very possible in this business and are even possible starting with nothing. You see “no money down” does not generally mean there is not money in the deal it just means that it does not have to be our money. My first property was bought as a rental when I was 21 years old and did not require one dime of my own money. I used two strategies combined that allowed me to use a partner and seller financing to accomplish this first deal. My second deal was also no money down and I received about a $7,000 paycheck on the resale. Now $7,000 isn’t all the money in the world but when you are starting from scratch with none of your own money at 21 years old $7,000 was a windfall! Thankfully the deals and checks got bigger but those first two deals were critical to my future success in real estate.

I want to take you through the 5 steps of any profitable fast turn on a single family home. The 5 essential steps are:

1) Find a good deal
2) Analyze deal quickly
3) Make offer and close on accepted deal (or follow up on deals that didn’t get done but were close)
4) Repair for maximum profit
5) Sell Quickly

Seems simple enough doesn’t it? Inside of each one of those 5 steps are the details that will make you be successful or struggle in this niche business. Tune in next week when we further examine each step in more depth.

An IRA Option Your Financial Advisor Won’t Tell You About

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When you set up an individual retirement account, you’re usually given a list of investment choices — mostly stock-based funds, and some bond funds. Many financial professionals call this a self-directed IRA, but it’s really just a multiple-choice IRA: “You can invest in anything you like, as long as we approve it and control the funds.”

However, a real self-directed IRA can be set up with an administrator who is approved to handle nontraditional investments, such as real estate, private loans, tax liens, limited liability corporations, options and other non-stock and non-bond investments. These IRA are for the active and educated investor, not for the investor who just wants to put money away and turn the management over to brokers or financial advisers. It’s more work, but the potential with this type of account is tremendous.

Let’s consider a few hypothetical investments.

  • If you bought a home for $50,000 using funds from your self-directed IRA and leased the property out for $900 a month, your net cash flow wouldn’t be taxable. If your net monthly positive cash flow was $550 (a reasonable figure), your $6,600 would either be tax-deferred or tax-free depending on the type of IRA you had used (traditional or Roth) to purchase the property. If you leased it for five years, that would mean $33,000 of positive cash flow would be in your IRA tax-free — plus, you still own the home. If you sold the home for $80,000, your net profit would be tax-deferred as well. In five years, you would have made $33,000 in cash flow plus $30,000 in appreciation, for a total of $63,000 of nontaxable profit in your IRA. And, yes, you can still take advantage of these types of deals.
  • You could buy a fixer upper for $50,000 and put $25,000 in repairs for a total investment of $75,000. If you flipped that property for $110,000 and netted $105,000 after sale expenses, that would be a $30,000 profit. That profit will be tax-deferred — and you can repeat the process. If you had flipped the property outside of your IRA, you would be subject to short-term capital gains taxes, payable at your ordinary income level. You would have had to give $10,000 to Uncle Sam, and you’d have been left with just $20,000 after tax profit.

A More Complicated Scenario

You could buy a property and sell it with a wraparound mortgage. Let’s say you find a fixer-upper where the seller is willing to take a small down payment and carry the balance of his equity in a note and mortgage. The seller will take a payment for his equity for a number of years. Say the purchase price is $100,000, and your down payment (from your IRA) is $10,000. You have a $90,000 mortgage payable to the seller with a 30-year amortization at 5 percent, with a five-year balloon payment, giving you a principle and interest payment of $483.

You later sell with these terms:

  • $125,000 purchase price.
  • $20,000 down payment (giving your IRA the $10,000 investment back plus a $10,000 profit).
  • $105,000 wraparound mortgage payable to you with a 30-year amortization at 7 percent, with a four-year balloon payment, giving you a $699 payment coming in every month.
  • You are responsible for the underlying payment of $483, giving you a positive cash flow of $216 per month or $2,592 per year. This will be a four-year net cash flow of $10,368, plus the $10,000 profit up front.
  • Also in four years, you will still be owed $100,000 but will only owe the underlying seller $84,000, giving you another profit on the back side of the sale of $16,000.

Let’s do a little back-of-the-envelope calculating to see if it’s worth your time to get educated on the ins and outs of this type of transaction. The profit over four years is $10,000 up front (the difference between the down payment you made and the down payment collected upon sale), $10,368 of positive cash flow and $16,000 of back end profit when loans are paid off for a $36,368 net profit for our IRA on a $10,000 investment that we received back in the first 90 days.

The Dodd-Frank Act mandates certain disclosure and actions be taken if you deal with private mortgages and financing. Get qualified help. Balloon mortgages are not acceptable anymore when selling to an ordinary buyer, but could be fine if you are selling to another investor.

In a transaction like this one, you would use borrowed money in the form of a seller-held mortgage. This would make some of your profit taxable out of the IRA, but the rest of the money would get to stay there tax-deferred. Your IRA can borrow money, but it has to be non-recourse debt, which means there are no personal guarantees on the money you borrow. If you don’t pay the seller, his or her only recourse is to foreclose on the house; he can’t come after the IRA or you personally for any deficiencies. Consult a highly knowledgeable real estate professional and an attorney to help you set this up properly. You should do research and get more training on these types of deals as well.

Some Limits Apply

There are some things you are not allowed to do with your IRA. Among them:

  • You can’t invest in collectibles such as stamps, coins, comics or baseball cards.
  • You can’t self-deal, which means no loaning money to yourself.
  • You can’t loan money nor do business with IRA money with anyone in your direct linear family chain, such as your spouse, children, grandchildren and parents. Your IRA may do business with family members not in your direct lineage, such as siblings, aunts and uncles).

Several companies offer self-directed IRAs; two of the bigger ones are Equity Trust and Entrust. Before you go this route, it is important to do your homework on which is a good fit for you and what you are trying to accomplish. But if you’re up for the challenge of nontraditional investments, you should take a close look at this fantastic opportunity to be fully in control of your IRA.