Ch 1 - Get Rich Slowly
- Real Estate is lucrative because:
- 9:1 Leverage, 10% down 90% loan
- Tax benefits:
- rent not subject to social security or self employment taxes like money you earn from working
- passive loss deduction (expenses, interest, depreciation)
- tax deferral - defer income on sale of property by reinvesting by a certain period
- tax free sale - avoid taxes if you lived there 2 out 5 years before selling
- long term capital gains
- Goal is to get cash flows not property apprecation
- 15 houses at $1k rent / month = $15k / month = $180k / year which is equivalent to $3.6M at 5% in a CD
- Annual Gross Multiplier - if you see an 8.2x in an ad for the following 16 units, 8 2s, 6 1s, 2 furn. studios...8.2x, $787,200. The rent / year = $787200/8.2
- bad because there is not account for: how/who pays for utilities, property taxes, vacancies, management costs,insurance (fire, liability, flood), maintenance, cost or purchase
- Raise rent every year by a small amount
- apartment buildings compound the effect
- Buy at wholesale price ( distressed sales ), but expect that only 5 - 10% offers will be accepted
- Only buy properties with a positive cash flow
- Best buys often come w/ the most problems
- Familiarize yourself w/ neighborhoods before you buy. Want to find places where people will always be renting
- Call property management firms and ask them :
- Are you or do you have a division, exclusively engaged in property management or do you primarily list and sell properties?
- Do you deal primarily w/ residential or commercial properties?
- In what geographic areas or the market are most of the properties you manage located?
- When you meet determine how they advertise vacancies, show properties, screen tenants, procedures for collecting past due rent, supervise evictions, control maintenance costs, deal w/ after hours emergencies, accounting they provide owners, fee structure, if they are licensed. => should be between 6% - 12% of rents collected
- when you sign agreement, insert a clause that gives you the right to cancel immediately within 30 or 60 days for any reason or immediately, w/o notice if any representations of the agreement are breached => won't be a problem w/ a reputable firm
- Find out if they will be willing to look at new properties w/ you because it allows you to get professional advice from ppl who know the market
- 2 / 4 bedroom, w/ 1 - 2 baths, about 800 to 1400 sq feet
- Beware of good deals on expensive properties, they may sit vacant for many months
- don't go for cheap properties that you're not comfortable being in yourself
- map your area ( 10 miles around your house ), every week new properties come up
- talk w/ the neighbors at different properties, find out problems in their neighborhood, give them your business card
- Usually house is 2%- 20% lower than asking price
- When you offer, use your ROI to determine your upper limit
- Sellers have moved - someone else in the house and the property looks like crap. Make sure house will be in good condition after painting / cleaning / carpeting
- Sellers divorced - try to find out as much info about each party as possible such as previous offers, how long it has been on the market,
- you can draw up separate agreement w/ each party if necessary
- Ask for lots of extras you don't care about so you have room to negotiate what you actually want
- Home equity to retirement => offer 0% or very low interest for steady stream of payments to retired person. When you do this financing, these are some things to consider:
- don't use a standard bank-type note that contains a due-on-sale clause
- if you ever did sell / trade the property, having an assumable no-interest mortgage would be a big advantage
- include a clause giving you the right to substitute collateral, because even if you sell the property, you may want to keep the loan and secure it with another property
- buy house from person, but let them rent from you
- scarcity - home prices rise when the number of people wanting to live in an area is increasing and regulations or terrain in that area restricts new building
- inflation - during times of inflation you want to own as much real estate as possible. when inflation is low you want the cash flows of the property to be sustainable
- time pressure - when ppl are under time pressure its much easier to get terrific buys
- things to look for:
- behind on mortgage payments and don't see how they can catch up
- in foreclosure and in danger of losing the property unless they can find a buer
- need money to pay off mounting debts
- contracted to buy another home and can't close on it until they sell this one
- need money for college, have to pay for wedding, large medical bills
- need capital to acquire / expand business
- lost lawsuit and don't have money to settle it
- retiring and want to move to Arizona
- make your own checklist from your observations
- acceptance time - people need time to digest the fact they aren't getting what they expected for their property. never close the door by saying 'this is my final offer'
- instead say 'I'm not saying I'll be in a position to buy later, but we can always talk some more'
- Spend lots of time w/ the seller
- longer you keep sellers involved in negotiations, the better chance you have of getting what you want
- take lots of time inspecting the property, ask as many questions as you can think. Discuss things you have in common (sports, ect.), measure some of the rooms and write it down, pace off the backyard...
- you are doing this to build trust and mentally this makes people think they have invested something in you and don't want to walk away w/ nothing for their time. this will help w/ flexibility on price, terms, ect
- note that this also works against you because you will not want to walk away w/ nothing either.
- work out all the details, so you're not surprised by anything (ie: appliances cost)
- Questions to ask sellers/find out in other ways: - don't be timid, be upfront about the questions. don't ask yes/no questions ask who, what, where, when, why, how questions
- how long have they owned
- how long has the property been for sale
- how many offers have been made
- what does the seller plan to do w/ the money from the sale
- how much does the seller owe on the property
- is the seller under any pressure to sell
- what are the reasons for wanting to sell. are these the real reasons?
- will the seller carry back any financing
- if listed w/ real estate agent, when does the listing expire
- hidden problems w/ the property
- any nearby problems that affect value of the property
- Project that you're prepared to walk away
- You can do this easily, if you have multiple properties that you're interested at that time
- Ask for more than you expect to get (lower price, lower interest rate for financing, seller pays attorney fees, termite inspection, home inspection, survey deed preparation, title insurance, later closing date if seller wants to close quickly, personal property like furniture, rugs, appliances)
- Go even more conservative w/ strangers because they may be willing to go for even less, it's easy to build rapport if you make concessions
- Minimum plausible position - make offers that are very low, yet will be taken seriously. you will be surprised at how low this is
- imply flexibility w/ this offer
- Letting the sellers negotiate up from your MPP will make them feel like they won
- Bracket the seller's asking price ( what they asked for, vs lowest they will go before saying no)
- No is just the beginning of negotiation
- Never say yes to the first proposal because it makes the seller think they could have done better
- Flinch when they first tell you the price like you're slightly shocked
- Play reluctant buyer => 'i hate you had to spend so much time for nothing, but to be fair, what is the lowest price you would take for this property'
- Vise technique - 'i'm sorry you'll have to do better' then don't say anything until they speak again
- Pay one house off completely, take a mortgage out against your house and then pay all cash deals for another house
- ie: Your house is 100k, and it is completely paid off
- You go to the bank, and get a loan (typically 90% - 95%) for the worth of your house
- You find another 100k house, but only offer 60k - 80k for it
- Since this house will also be fully paid of, you rent it and then a loan out against the new property (typically 90% - 95%)
- Do this about 6 times (6 new houses + 1 original house), until the mortgage money from each house minus the amount you paid cash for it = final value to buy a new house
- All the rental streams pay for the houses and you keep the rest
No comments:
Post a Comment