Wednesday, November 21, 2007

The Real Cost of Taxes

A friend and I were discussing the extremely high taxes in Maine (Maine has the highest taxes per capita of any state). Normally, I try to avoid such discussions, particularly because they are such a sore spot with me. Typically, the states with the highest taxes have the least to show for it. They have bad roads, old bridges, few worthwhile services. It seems the more money the tax-and-spend crowd takes, they less we get for it. Just across the border, in New Hampshire, there are very few taxes. Yet NH has good roads, bridges, schools and many services.

Back to the point of this missive - the REAL cost of taxes. My friend said, "What's the big deal? You make $200,000 a year. What's $10,000 compared to that? It's nothing!"

Of course, I could have stopped him right there by saying, "OK, George, if $10,000 is nothing, how about paying it for me. After all, what's 'nothing' between friends?" But I opted for something more substantial.

I showed George how money, earning 10% per year, would double every 7 years. "So what", was his response.

I then told him that if I were able to keep that $10,000, I could invest it, and double it every 7 years. In 28 years it would accumulate to $160,000. Multiply that by each year that Maine takes that $10K, and before you know it, your family's future has been deprived of millions of dollars over time.

Let's say a person only earns $80K per year, and their state taxes them a paltry 5%. That person pays $4,000/year. If this begins at age 21 until retirement at 65, the state has taken a total of $176,000. That, alone, is a healthy sum.

But if the taxpayer had invested that at an average return of 10%, that $176,000 would have grown to $1,770,370 in just the first 40 years.

That individual, paying his state $4,000 per year, loses close to two million dollars over the course of his working life.

And that, George, is the REAL cost of taxes. Every $1,000 a person pays in taxes is over $45,000 lost in 40 years.

More important, this same thing goes for money a person spends today. For every $1000 you spend unnecessarily this year, your net worth could be decreasing by $45,000 over your working life. Buy a $5,000 snowmobile, it costs you $225,000 over your working life. Buy an $80,000 Mercedes instead of a $25,000 Ford, and it costs you almost 2.5 million. That certainly is one expensive set of wheels!

Think about that the next time you are tempted to spend money unnecessarily...

Friday, November 16, 2007

Foreclosures, Tax Liens and Slow Markets

If you have any real interest in real estate, you are well aware of all the bleak news stories about the increasing foreclosure rate, and slowing markets with dropping property values.

But is everything a dour as the media is telling us?

Let's put a few things in perspective. First, the foreclosure rate. Among the pending foreclosures, the rate has not changed on properties that were financed using traditional financing methods. Almost the entire increase in the foreclosure rate is based solely on properties that were financed using sub-prime loans and ARM's. In other words, had questionable loans not been made, the foreclosure rate would be stable. This would indicate that the foreclosure rate is artificially inflated.

As for the cooling market and dropping values...

Last time I looked, although not good news for sellers, those conditions are great news for buyers and investors. What is wrong with that? In a hot market, which is great for sellers, the market is bad for buyers. So what is the difference? The difference lies in which party, buyer or seller, is on top. For the investor, either market is good. In a seller's market, the investor can easily find a new buyer to sell to, at a higher price. And in a buyer's market, the investor can find bargains, making positive cash flow easier to achieve. Either way, investors win.

But there is one other difference between a buyer's and seller's market. In a seller's market, money moves faster. And people buy appliances, furnishings etc. for their new homes. This strengthens the economy, as businesses hire employees to produce more, and investors buy stock in growing companies. The reverse is true in a buyer's market, and that often hurts the economy.

And there is another boon to investors in today's slowing market. As costs increase for homeowners who used subprime funding, they often fall behind in their property taxes. This results in the county or state selling tax lien certificates on those properties, which usually provide investors with a better-than-average yield - and sometimes eventual ownership of the property. Some "gurus", such as John Beck, offer programs on tax lien investing. But beware - such gurus often hype the positive points and fail to tell you the other side. Before doing business with any guru, check them out with the Better Business Bureau, the online "review" and "scam" reports, and other consumer resources.

Real estate, like any other part of our economic lives, fluctuates. But in the long term, it always goes up. That is because Mark Twain was correct - "If you must invest, invest in real estate. They just don't make it anymore." The population just keeps growing - it is expected to double over the next 40 years. But the amount of Earth (real estate) available to those people is not increasing - we got what we got and that's all there is.

And that is precisely why real estate investing is a very smart thing to get into.

Monday, November 12, 2007

CAP Rate - Investing in Income Properties

Most seasoned investors are familiar with how to determine value of an investment by its CAP RATE. But novices - and even a few "pros", are confused by this method. So, here it is in a thimble:

CAP RATE stands for Capitalization Rate - the rate at which an investment produces a return on investment. The higher the cap rate, the faster you get your investment back, and the richer you get. Simple, eh?

But just how do you figure CAP rate?

Step #1 - determine the annual NET rental income from the property (gross rents minus expenses, such as tax, insurance, maintenance etc.)

Step #2 - divide the net rent by the fair market value (FMV)

Let's say you find a complex with FMV of $250,000. You estimate net rents would come to $2,000/month, or $24,000/year. By dividing 24,000 by 250,000, you have a CAP RATE of 9.6%. If that is not good enough for you, then you must either get a lower price, increase rents, or walk away.

For most investors, a CAP rate of 10% is absolutely minimum, and many investors won't consider anything less than 12-15%.

More important, you can use this method to determine the maximum you should pay for a property, based on the CAP rate you need to get. For example, if you need to get a 10% CAP rate, and the net rent is $24,000 per year, you would divide 24,000 by 10% (24,000 x .10), which comes to $240,000 - the max you should pay to get a cap rate of 10%.

Saturday, November 3, 2007

Is The Foreclosure Rate a True Barometer?

To listen to the news, everyone would believe that this country - and real estate investors in particular - should be scared to death because of "all the foreclosures" that are pending, and that they will decimate the economy. But should we really worry?

I don't, and I will tell you why. But first let me remind you that I have been investing successfully in real estate for nearly 40 years. I've seen a lot of so-called trends. Yes, there are a lot of foreclosures now. But before we panic, we need to take a closer look.

Most of those foreclosures are people who bought above their means, using sub-prime mortgages that, until a few years ago, were not ever made available. Greedy lenders, preying on people who were eager to start out at the top with executive homes, made loans they should never have made.

What I am saying is this - the bulk of the foreclosures are due to sub-prime loans. And the important point to remember is that, among "normal" mortgages, the foreclosure rate has not changed.

So, it is not the economy that is causing the high foreclosure rate. It is greed and foolishness. If we remove the unnecessary sub-prime foreclosures that are artifically inflating the foreclosure rate, we find that the economy is quite normal.

Certainly, all those foreclosures will still affect the economy, much as any other abnormal occurence will change things temporarily. It is a lot like a nor'easter: when one rolls in, it causes quite a bit of damage for a day or two. But in no time, it is gone, and there is no sign that it ever happened.

Not to worry about all those foreclosures - at least not over the long term. It is temporary, and its effects will be limited. Unless, of course, you grabbed one of those sub-prime mortgages...

The Art of Persuasion

Chances are you know someone who can easily persuade people, or who can sell ice to Eskimos. What is their secret?

Well, it could be a number of things, but almost certainly part of the secret lies in the actual words they choose. As you may have learned from the previous post, "Who Are You?", we are products of our environment. As such, one thing is absolutely certain - we rely upon our five senses to absorb info and learn. And the secret lies right there.

Some people rely most heavily on sight for inputting info. Others may rely most heavily on hearing (perhaps their eyesight is weak). Still others may depend heavily upon touch, smell, or taste. The point is, we are most easily swayed by our dominant sense. If you are sight oriented, you are more apt to believe what you see. If hearing oriented, you may place more importance on what you hear.

That brings us to one of the great secrets of effective communication. If you take a few moments making "small talk" with someone (as good salesmen do), take care to learn which sense seems to be dominant, based on their choice of words. For example, if the person uses phrases like, "I think that stinks", that may hint that smell is one of his more dominant senses. If you hear phrases like, "It sounds good" (hearing), or "It looks good"(sight), you have a clue as to how they absorb input. Once you know how they assimilate information, you can use that sense to get them to listen to you more intently, and to better understand what you are saying.

This can be very persuasive.

In my 35+ year career as a real estate investor, selling homes is often a priority. If I find that the buyer uses "sight" words, then I use sight-oriented info to help him buy. I highlight the beautiful view, for example. If he is hearing oriented, I might mention the sounds of the songbirds, rippling brook, etc. In this fashion, I am better able to capture his attention, and in doing so, persuade him to buy. If he uses a lot of "smell" words, I make sure there are cookies baking in the oven, or lots of flowers.

We all think, learn and communicate according to how we rely upon our senses for data input. You can use that to influence others. The more we rely upon a certain sense for absorbing information into our subconscious mind, the more importance we place on the language that calls that sense into play.

Whether you are selling real estate, or just trying to persuade your teen that smoking is bad, try connecting by using words and phrases the other person is most likely to relate to. In doing so, your power of persuasion can guide you to greater success in all aspects of your life.

Friday, November 2, 2007

Negotiate Real Estate Commissions

Few home sellers - or even buyers, for that matter - are aware that the Realtor commission for selling (or buying) their home is negotiable. You should consider the broker's "offer" for the commission to be a starting point for negotiation. Why?

The biggest reason is due to such high property values. When the average home is $280,000, a 6% commission is a whopping $16,800. While Realtors will want that much, seldom would they object to getting paid a "mere" $11,200 (4%). And some "discount" places like ZipRealty and Assist-2-Sell only charge 1-2%. So, if you are selling your home, don't be afraid to negotiate that commission - it can put thousands of extra $$$ in your pocket.

Since more and more homes are reaching or exceeding the $500,000 mark, even a 1/2% reduction in commission can result in savings of at least $2500.

And while you are in a mood for negotiating, buyers should try to negotiate "freebies" into the purchase, such as the gardening tools, snowblower, a chandelier etc. And sellers may even want to negotiate the retention of certain rights, such as "air rights". Why? As communities grow, so do the buildings in many instances. In the future, your children or grandchildren could sell those air rights for a lot of money, as businesses and developers need to build upward. After all, that is one of the wealth producing methods of the late, great John D Rockefeller. He owned substantial air rights in New York. As the skyscapers rose, so did his wealth!

Selling Your Home in a Slow Market

As housing sales begin to slow, sellers find it more difficult to attract any of the buyers that are still looking. Here are some ideas on how to attract buyers when others cannot.

1) Spruce up the first thing(s) a buyer sees - often the front entrance and driveway. This is their first impression - if it is not a good one, the showing will go downhill from there.

2) Have the place well-lit when being shown, and eliminate clutter, even if you must rent a storage unit to keep excess furnishings. Buyers like free space.

3) People buy because of the unseen things that attract them. Just before a showing, bake apple pie, or cookies, or brownies. The aroma pleases the senses, and triggers nostalgic memories that can help induce a buyer to buy. If you do not have time to bake, boil some water and drop in a couple cinnamon sticks.

4) Most Realtors simply mention the features of a property. But buyers do not buy features - they buy the benefits produced by features. Get a leg up on other sellers by promoting the benefits of owning your home. For example, if close to schools (feature), Mom can sleep late (benefit). If close to a lake or pond (feature), advertise lazy Saturdays fishing from the canoe that is included with the property (cost: about $300). The canoe becomes another perk.

I recently sold a home that had acres of lawn area. Now, most people do not look forward to mowing such an expanse, so the first thing I showed potential buyers was the shed - which housed a nice lawn tractor, power trimmer, garden cart and all the "toys" that make the yard work a cinch. When hubby saw those toys and heard I was "throwing them in" for free, he just could not control himself. I had him signed that same day. So, don't forget those little perks if you need help getting a property sold.

Thursday, November 1, 2007

Reverse Mortgages

You have probably seen the TV commercials about reverse mortgages for retired persons who need more income. But what you may not know is that I "invented" the reverse mortgage in 1989 - years before banks started offering it. In my book, "The Simple Man's Guide to Real Estate", it was aptly named the "Golden Years" method. And it has some serious advantages over the model that banks use. (NOTE: One person suggested that J.B. Nutter claims to have invented the reverse mortgage in 1961, and that investors in Europe have been buying up properties for a song, letting the previous owner live out their life there, then getting the property when that person dies. In both cases, these are not reverse mortgages - they are Life Estates).

Some major differences include:

*Reverse mortgages offered by a bank results in the equity in the home being transferred outside the family. This is not necessarily true with the Goilden Years strategy

* Reverse mortgages offered by banks tend to include high fees and expenses. With the Golden Years method, fees and expenses can be nearly eliminated

* Reverse mortgages offered by banks are limited in maximum dollar amounts, determined by the age of the homeowner. With Golden Years, there are no dollar limits, regardless of age.

Our "Golden Years" method is the very same reverse mortgage, but it need not have any of the drawbacks that are listed above. More important, a personal Reverse Mortgage (ala "Golden Years") can have substantial tax advantages. For example, if you use this method on your parents home, you transfer money to them, and they transfer the home to you (upon their passing) without any gift tax problems. Furthermore, by transferring the equity to you, they can drastically reduce estate tax. And any fees or expenses incurred in using the Golden Years strategy are deductible.

Also, when the loan is repaid, your parents (or their estate) can take a nice deduction on the accumulated interest that is paid to you.

A note of caution: if you offer a reverse mortgage to a family member, be sure it is an "arm's length" transaction. In short, you must charge market interest rates (or close to it), and the contract must be legally enforceable.

The Greatest "Secret" to Success

The following is an excerpt (reprinted by permission, of course) from an excellent, free eBook that offers the 10 Principles of Success. The eBook is entitled "Wealth From Thin Air", published by IntelliBiz. When you read this, I think you will see the great wisdom that this unique eBook can impart, and you will want to read the entire eBook. And you should - after all, it is not only a great resource, but it is also absolutely free - they don't even ask you to register, give your email address or anything. We are providing a link to the eBook at the end of this article. Enjoy!
Secret #3
The secret you are about to learn may well be the most important one of all. The concept is so simple and logical that most people overlook it. Don't make that mistake - if there is but one thing that is absolutely essential for sustained success, this is it!

It is important to realize one, simple fact - everything that exists is, to one degree or another, either an asset or a liability. Now, it is true that many things have traits of both, such as a weapon. On the one hand, if faced with threat of violence, a weapon in your possession would be an asset. But in the wrong hands (i.e. that mugger in front of you), it could be a liability. Debts, while often called liabilities, can also be an asset. For example, you may owe on a mortgage (liability). But that debt proves to other creditors that you are creditworthy and responsible (asset), allowing you to obtain more credit when needed.

People are no different - each of us is both an asset and a liability to those around us. Some, such as Saint Theresa, are more of an asset than others who may be liabilities (bin Laden comes to mind). But most of us are a rather ordinary mix of both.

The key to remember here is that the more of an asset you are, the greater your success will be. Conversely, the more of a liability you pose, the greater your chances of failing.

You may know that guy in town who is always grumpy, never has a kind word for anyone, keeps his yard looking like a junkyard and is generally an all-around pain in the butt. And you may notice he is a real nobody - a loser. No one will lift a finger for him in his time of need. No one wants to be around him. And no one will value him enough to give him a good stock tip. How could he ever hope to get ahead when no one will even come near him?

On the other hand, we all know someone who is quick to help when needed, someone who is always pleasant and smiling. He/she just makes you feel good whenever they are around. You enjoy their company. And if this person is ever in trouble, everyone will be there to help. Is it just a question of friendship? While that may be a part of it, it surely is not all of it. What is important is why and how such a person instills such friendly spirits in people.

First, however, we need to look at the benefits of being an asset. Consider two used-car dealers, Bob and Carl. Bob is a bit of a shyster, out for the quick sale. He uses pressure tactics. Once a sale is made, you never hear from him again, unless you make the mistake of going back someday. His cars are not properly maintained and always have problems, which he won't fix. Yep - Bob makes a lot of money at first. But sooner or later, folks catch on and go elsewhere, and Bob loses all he has worked for. Bob is more of a liability than an asset.

Carl, on the other hand is friendly and courteous. He talks about you and your family. He learns things about his customers, like birthdays and anniversaries. There is no pressure - he sincerely wants you to be happy with your choice. After the sale, Carl contacts you and asks how it's going, and lets you know that if you have problems, bring it in and he'll take care of you. You may get a card on your birthday or anniversary, letting you know that Carl really is interested in you, and cares. After a while, all of those unhappy people who left Bob are buying their cars from Carl, and Carl's wealth grows. And Carl is not afraid to use some of that wealth to help others in need, either.

Suddenly, and without warning, both Bob's house and Carl's house, which are side-by-side, burn to the ground. How many people do you suppose will rally around Bob and help him rebuild? How many around Carl? Understand an important principle at work here. People like successful people (assets). They want to be around them, perhaps hoping it will "rub off". More importantly, people need successful people. Successful people "protect" those around them, because they know it is those around them who have helped them to build wealth. By the same token, those around him understand that as long as they protect him, and keep him wealthy, he will be there to protect them from harm. On the other hand, most of us want nothing to do with people who pose a liability.

How much of an asset you are, and how many people you are an asset to, will determine the extent of your success. Bill Gates is tremendously successful because he is an asset to much of the world - it is through him that we all have computers that are relatively simple to use; computers that make our lives so much easier. Because Bill provides such a service, we keep throwing money at him.

On the other hand, the local business owner at the computer store will only achieve a small portion of the success that Bill Gates enjoys. This is because his "asset allocation" is being limited to a local area.

Depending on the level of success you wish to achieve, understand that 1) you must be more of an asset than a liability, and 2) you must be an asset to as many people as it takes to reach your desired level of success. If you want to beat Bill Gates, you will need to be an asset to the world. Otherwise, you may just want to be an asset to a few thousand people in your own community.

Secret #3 Summary: Be an asset to those around you - always. The greater the success you desire, the more of an asset you must be, to as many people as possible. Remember - you enjoy your own assets. And so do other folks. If you are one of their assets, you fall under their protection, and they will cater to you and protect you, just as they would any of their other assets.
Read the entire "Wealth From Thin Air" eBook, absolutely free.

The Truth About Flipping

There has been a lot written about flipping houses. Some say it is great way to make money. Some say it is very difficult. Some even claim it is illegal. So, just what is the truth?

First, let us begin by saying there are many different methods of flipping real estate, including "fix & flip", the double escrow, assigning, and various combinations. Technically speaking, almost any purchase and resale of a property is a "flip", even if the resale occurs years later. But for the purpose of this article, we will concentrate an "quick flips."

Let's take care of the "illegal" claims, first. Flipping houses, if done the way it was meant to be done, is completely legal. But it becomes illegal when unscrupulous investors, working with unscrupulous appraisers or lenders, conspire to defraud either buyers or lenders. This is done when an investor gets an appraiser or lender to over-value a property for the purpose of selling for a higher-than-market value, or for the purposes of getting a bigger mortgage so the investor can pocket more cash. For this reason, HUD issued a policy (not a law) that lenders who provide HUD/FHA or VA insured loans must include a "seasoning clause" in their mortgages, which can make some forms of flipping difficult by requiring a property be owned at least 12 months before it can be resold. This "seasoning clause" is only a requirement for HUD/FHA/VA insured mortgages, though many lenders have adopted it as policy (which can be negotiated out of the mortgage). But even HUD/FHA/VA seasoning clauses have exceptions, with the most important one being that the clause can be waived as long as the seller can show he is not selling for more than the legitimate market value. In short, the flipping is not what is illegal - what is illegal is the fraud that can be perpetrated when crooked people abuse flipping.

IntelliBiz strongly urges our own clients to always operate in an ethical fashion. Fraud is not necessary. Our program includes details on every legitimate method of flipping houses, and if you use the strategies in our program, not only will you be within the law, but you will profit immensely, and earn yourself a solid reputation as a good person to do business with.

Now, about it being difficult. People like John T Reed claim that in order to flip real estate, the investor must first buy the property and only then find a buyer to resell to. Let's put that falsehood to rest right now - if you will look at these online courthouse docs, you will see that you can, indeed, resell at a double escrow (both transactions occuring at the same time), without ever having to finance a single penny. Or, you may simply sell your purchase agreement to another investor prior to closing, so you never need to finance anything because you are not actually buying any property.

The reality is that there are a number of ways to flip real estate. Some methods require financing - others do not. Some methods do not require cash or credit. And most methods are quite simple to do. If Mr. Reed were a true real estate investor worthy of writing about such matters, he would know that.

That said (and proven), let us consider other claims that flipping real estate is very difficult and time-consuming. Since the most difficult part is finding a suitable property, the rest of the transaction consists of negotiating the deal (no different from any other transaction), find a new buyer, then wait until closing when the closing agent takes care of everything else. Personally, we have never found laying on the beach, waiting for a closing, to be all that time-consuming or stressful.

Then there are the unfounded fears that for some unknown reason, your seller and/or your buyer will revolt at closing when they "discover" you are making a profit.

We can only assume that the investors who have this fear feel it is necessary to keep it a secret that they are an investor. We do not advocate that. Again, we stress ethical conduct. Simply make sure your seller and your buyer are fully aware that you are an investor - it is nothing to be ashamed of! If they know this, they will obviously know, up front, that you must make a profit - you would not be in the deal, otherwise. At closing there will be no anger because they were not deceived. In over 35 years of doing this, we have not seen one case where closing did not complete because of such problems, because the problems never arose in the first place.

Yes, flipping real estate is a great way to make a lot of money in a short period of time. And it, like any other endeavor, can be stressful at times. It is not as easy as many "gurus" would have you believe, but it is not all that difficult, either. The secret lies in 1) knowing which properties lend themselves to flipping (IntelliBiz can show you how to find them), 2) being honest and up front, and 3) using the right contracts, specially designed for flipping, such as the ones in our contract software.

So, now you know that flipping houses is legal, relatively simple and requires no cash or credit. So, what are you waiting for? The future belongs to those who march boldly into it, armed with knowledge. And if you are currently a bit short on the knowledge aspect, that is easily remedied by visiting IntelliBiz.