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Become a millionaire real estate mogul
By Lisa Gibbs @Money July 20, 2012: 8:35 AM ET
(Money magazine) — Becoming a landlord has always been a well-worn path to millionaire status, with good reason: Not only does owning properties let you generate a second source of income, your tenants’ checks will help you build equity in your investment.
The case for owning rental real estate is even more compelling now thanks to depressed prices, super-low interest rates, and the fact that the shortage of rental housing is the most acute it’s been in five years, according to Core Logic
With median prices on existing homes at around $182,600, you won’t get rich by owning one home. Based on modest estimates for appreciation and reasonable expectations for profits, it’s likely to take three or more properties to produce the cumulative equity and rental earnings you need to get to the nominal sum of $1 million down the road. (Throughout this story, references to $1 million are to the nominal — not inflation-adjusted — figure.)
Part of a special report on How to reach $1 million, this story explains how investing in real estate can put you on the track to becoming a millionaire.
KEY MOVE: Expand your holdings to at least three properties
HOW TO GET THERE
Maximize your market. Once you own a property or two in an area, adding a third nearby generally makes sense, says Chris Clothier, co-owner of Memphis Invest, which buys and manages rental homes for investors. “It’s usually easier to manage,” he says. You can also save on maintenance by using a single contractor.
If fielding late-night calls about water leaks doesn’t grab you, grouping your properties will also let you find a single company to manage your properties (typically for about 8% to 10% of the rent plus commissions).
Of course, you’ll want greater diversification if you’re buying in a smaller town dominated by a single large employer.
Think duplex or triplex. That extra unit probably won’t cost you much more, yet the extra rent can be significant.
Three years ago real estate agent Greg Markov bought a triplex in Phoenix for $70,000, or about $5,000 more than what he would have paid for a single-family home in the same neighborhood. With more units, Markov’s maintenance costs are higher — he budgets $2,000 a year, vs. $1,000 for a one-family home. Yet the three units throw off $1,500 a month in rent, not $900.
Also, Fannie Mae rules state that you can finance up to four properties — which includes your primary residence — with just 20% down. Homes five through 10 will require at least 25% down and a higher credit score (720 vs. 620). Fannie, however, counts a duplex, triplex, or fourplex as a single property, so you can finance more units at beneficial terms.
Finance creatively. Take what the market is giving you. Buying with cash, for instance, will get you the best prices. So if you have, say, $150,000 saved up, try purchasing house No. 1 with savings. Then within six months, take out a Fannie Mae-backed loan on 80% — in that time frame Fannie will consider it a purchase loan, with better terms than a cash-out refinance. You can use that $120,000 to buy house No. 2.
Own your own company? The U.S. Small Business Administration offers 10% down low-cost real estate loans as long as the business occupies at least 51% of the space.
In 2010, Greg and Audrey Charlap of Hermosa Beach, Calif., obtained SBA financing for a $755,000 store/warehouse with three apartments upstairs. The rent checks cut the real estate tab for their business, baby-products retailer Pampered Tot, by 35%, Greg says.
GETTING INTO GEAR
Where to look. Begin your search near large employment centers or universities, where strong rental demand will ensure profitability.
How to price it. Your operating income — rents minus expenses, not including debt service — should be at least 1.25 times your principal and interest, says mortgage broker Kathleen Kramer.
How to dress it up. Don’t scrimp on amenities. A few upgrades, such as granite countertops, will make your rental stand out and reduce vacancies.
How to vet tenants. For $10 to $30, services such as LexisNexis and mysmartmove.com will run credit and criminal background checks.
For a full Report visit: http://money.cnn.com/2012/07/20/real_estate/millionarie.moneymag/index.htm
A real estate investing guide for 2012
B y Harvey S. Jacobs, Published: February 2
If you are like me, you may be reflecting on how poorly your investment portfolio performed in 2011. All stock indices, except the Dow Jones, were down. Your savings account, if any, may have earned an anemic 0.25 percent. Assuming you are convinced that 2012 is the year to take the real estate investment plunge, you may want to consider the following.
Real estate limited partnerships, or pools that invest directly in property, may provide an attractive vehicle. Those partnerships are generally formed by real estate professionals with prior experience in buying, financing, operating, managing, leasing and selling real estate to maximize their investors’ overall return. They will often seek to reduce their risk by buying a diversified portfolio such as office or apartment buildings, commercial or industrial property, mortgage notes or even bank-owned real estate (REO).
For those looking to actively manage their real estate investment, and especially for the first-time investor, I would recommend purchasing a residential condominium — ideally, a two-bedroom unit in a prime location with low condo fees. These are typically the easiest to rent out and command the highest rental rates.
In a condominium, you need to make sure that investors are welcome. Many condominiums restrict condo unit rentals and impose stiff move-in or move-out fees that you may not be able to pass through to your tenants. You should also check with the management company to make sure that the condominium does not have so many investors that it is no longer eligible for Fannie Mae conforming financing. Lenders typically will not make loans in condominiums that have too many investor-owners.
The condominium declaration, bylaws and house rules must be reviewed to verify that you can legally rent out your unit. I strongly recommend you thoroughly investigate the condominium association’s solvency to make sure it is collecting its condo fees in a timely manner. This financial due diligence should analyze the condominium’s cash reserves to make sure they are sufficient to cover all scheduled maintenance items such as roof replacement, HVAC systems and elevator replacement. The condominium’s treasury should be analyzed to see if it can pay for emergency repairs for unforeseen events such as floods, fires or storm damage not covered by insurance.
Because condominiums historically have not appreciated in value as much as other properties, many folks, seeking to maximize their profit, turn to single-family homes. But single-family homes also pose the greatest risk and require extensive hands-on time, effort and expertise. Especially for the first-time investor, the first step in buying a single- family home as an investment is to conduct a thorough and professional home inspection. You should accompany the inspector so he can show you the home’s “bones” and point out any defects or necessary repairs. He should also provide you with a written cost estimate to make those repairs or replacements. Depending on the home inspection’s results, additional detailed chimney, HVAC, radon or mold inspections may be wise. Most lenders will require a pest inspection.
The next major step is to create the budget and timeline for any repairs, replacements or improvements you intend to complete. Unless you intend to do this work yourself and thus invest your “sweat equity,” you will need to hire a general contractor. Depending on the scope of the work, you may want to be your own general contractor and hire the necessary licensed and insured subcontractors. Once you have your initial timeline and budget, go back and recalculate, this time assuming it will cost twice as much and take three times as long as your original estimate. Only then will you have a reasonable plan.
In making any investment decision for rental real estate, you need to factor in your annual rate of return from your rental income as well as any anticipated capital appreciation. I do not recommend basing an investment decision on future appreciation projections. Rather, the safest course is to invest only if you think that your total annual rental income will equal or exceed your total annual carrying costs. In other words, don’t invest unless you are cash flow positive, or at least cash flow neutral. Total annual rental income can be estimated by working with a competent, local real estate agent who handles rentals. Online services such as Craigslist are also essential resources in estimating rental income.
Total estimated carrying costs include: mortgage principal, interest, taxes, insurance (if not covered by your condo fee), condo fee, special assessments, tenant move-in fees, utilities, repairs, maintenance, cleaning, rental commissions, rental licenses, legal and accounting fees and a vacancy allowance. When making the investment decision, I recommend a conservative approach and ignore any beneficial tax considerations such as deductions for mortgage interest, real property tax or depreciation.
Yes, it’s cliché, but it’s absolutely true: The most important factor in making any real estate investment, whether in condominiums, townhouses or single-family residences, is location. You can always renovate, redecorate or redesign your property’s interior to correct certain design imperfections, but you cannot do anything about an inferior location. Do not assume that the neighborhood will improve. Do not assume you can make up for an inferior location by getting a bargain purchase price. It is a bargain purchase price because it is an inferior location. You will be selling at a bargain sales price when you go to sell regardless of how nicely you have fixed up the interior.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel.
You need a good idea. Startup cash can make a real difference. Business experience and savvy also help, of course. But to take advantage of the most powerful weapon an entrepreneur can have, find a mentor.
A good mentor helps you think through a business idea, suggests ways to generate that startup capital and provides the experience and savvy you’re missing. You’ll get praise when you deserve it and a heads-up when trouble comes — probably long before you would have noticed it yourself.
My grandfather who owned a memorabilia and antique shop in Vancouver, British Columbia, was a natural entrepreneur. He helped my brother Matthew and me launch our first successful venture: selling toy airplanes at a local festival when we were just seven and eight years old. With his help, we developed just the right marketing strategy — putting on a show with the planes that created excitement and a “wow” impact. We sold out of planes in just two hours.
Our first mentor was someone whom we trusted and who cared about our success. He had the knowledge and skills to keep us focused, and he knew a small early success would spur us on to more entrepreneurial attempts. Looking back, I realize he really engineered our first foray into business to build our confidence and help us understand what it’s like to work for ourselves. Even now, nearly 30 years later, Matthew and I find ourselves remembering his advice when we’re planning or making decisions.
Although few entrepreneurs are fortunate enough to have a keen mentor in the family, it is possible to find one or two. Here are eight tips to getting the right mentor — or group of mentors — for you:
- Determine your needs. Keeping in mind that your mentoring needs will shift as you start and build your business, take the time to determine exactly what kind of mentor you want now. Are you having trouble with the numbers, understanding your market or operations? Are you ready to ramp up production or still playing with concepts? Build a wish list for your mentor — laying out what skills and support you need to get to the next step.
- Take time to network. Networking isn’t just important for finding customers. It’s also vital for finding a mentor. Who do you want helping you? Someone who sits in an office and thinks connecting with the business community means reading a couple of magazines a month? No, you want someone who’s out there, knows the market and can point you in the right direction.
- Listen more, talk less. Given your youthful enthusiasm for entrepreneurship, it may be hard to stay silent. But to find a mentor, you need to listen — a lot. Pay attention and you‘ll be able to separate the smart potential mentors from those who just use all the right words.
- Be “mentorable.” If you come off as someone who knows everything — or thinks you do — many people will back away. If you want to learn, be willing to consider ideas that may not match your expectations or opinions. Above all, don’t fall victim to your own hype. Your business may or may not have serious problems, but another viewpoint will help you sort things out.
- Remain flexible. You may have mentors who stay with you over the long haul, but you will also benefit from people who provide just an afternoon of insightful ideas. If you are fortunate enough to get time with someone who is rarely available, absorb all you can and take notes. Your mentor may be skilled only in one specific area, but that’s okay. All help is good help.
- Don’t overlook nontraditional mentors. Some mentors may help you without their knowledge through books, seminars, speeches, videos on Ted, TV programs and the internet. My brother and I always looked to Richard Branson as one of our mentors. We don’t have to meet him in person to appreciate all he provides to entrepreneurs and others all over the world.
- Thank your mentors. When people help you, intentionally or unintentionally, let them know. Mentors are not in it for the money; they just want to help others grow. Think about what you can do to let them know how much you appreciate them and their help.
- Pay it forward. You may never be able to pay your mentors back, but you can recognize what they’ve done for you by becoming a mentor to others. That’s one reason we started YoungEntrepreneur.com: to support those who share our dreams and goals.
Mood of the Market
By Tara-Nicholle Nelson, Tuesday, December 27, 2011.
With 2012 nearly upon us, many of us will be spending this week reviewing the events of 2011 and setting resolutions, goals or visions for what we’d like to accomplish next year.
It will come as no surprise that the most common New Year’s resolutions fall into the categories of getting organized and getting fit — physically and financially.
Financial fitness includes getting your real estate business in order. But you can’t set up your real estate plans for the year in a vacuum. They must be done in context of what’s going on in the market. Here are four predictions about what that market context will look like in the coming year:
1. Even more foreclosures
While I’d like to claim crystal-ball credit for this one, it doesn’t take heightened powers of prediction to foresee an uptick in the rate of home repossessions in 2012. Last fall’s robo-signing debacle and the ongoing legal fallout from it created a massive backlog in the foreclosure pipeline, meaning that banks are taking many months, even years, to actually foreclose on mortgages in default.
Earlier this year, the New York Times reported that the additional hurdles New York state courts are requiring banks to leap in the wake of the robo-signing revelations, like additional settlement meetings with the homeowner to see if a modification can be brokered, have created a backlog of foreclosures that it would take 62 years to clear, at the current rate of foreclosure.
It’s pretty clear that in 2012 and beyond, the banks will work through those backlogs. The inevitable result will be an increase in foreclosures.
2. REOs and short sales will become the new normal
If you even know anyone who has house-hunted in the past couple of years, you’ve likely heard tales of the high-drama high jinks — super-long escrows, first-time buyers being bested by investors’ cash offers, banks resistant to negotiating for repairs — that take place in the course of a distressed property sale.
In the coming year, distressed home sales will continue to represent an increasing share of homes on the market. So, buyers will shift from considering whether to buy a short sale to understanding that they must be educated and prepared to do a deal with a seller, a bank (to buy an REO) or a hybrid of the two (to buy a short sale) to access the full selection of homes on the market.
This, in turn, will empower buyers to make smart decisions about what to offer and what to expect on any listing they like, as well as to set smart priorities and make realistic comparisons between listings based on their own personal priorities around timing, certainty and seller flexibility.
3. So-called ‘smart cities’ will do well
This year, a number of housing markets saw double- or even triple-dips in home values. In others, pricing stayed relatively flat. However, in areas where technology powers the economy, home values prospered along with the industry. Silicon Valley real estate, for instance, saw fierce competition among buyers as the young employees of companies that went public like used their newly stocked bank accounts to buy their first homes.
I recently talked with Jed Kolko, chief economist for real estate search site Trulia, and his 2012 forecast was that so-called “smart cities” will continue to have hot real estate markets next year. But Kolko defined smart cities much more broadly than the California tech hubs. Other tech centers like Austin, Texas, and the Massachusetts suburbs of Cambridge, Newton and Framingham all made Kolko’s list, as did Rochester, N.Y. (a town known for its highly educated, highly skilled work force).
4. Consumers will get ‘hopeless’
I mean hopeless in the best of all possible ways. For years, buyers and sellers have been waiting for that singular event to occur that would cause a quick market recovery. But 2012 will mark the fifth or sixth year of the real estate recession, depending on who you talk to. I predict that those consumers who have not already done so will drop unrealistic hopes for a fast return to the heady real estate fortunes of the subprime era. Instead, people will make their real estate plans based on:
- today’s low home prices, rather than the fantasy of what could happen if the market miraculously came back;
- assumptions of very low, or no, appreciation in home values for years to come; and
- very conservative estimates of their own finances and how they will grow.
As a result, buyers won’t break their necks to hurry and buy before prices uptick; rather, they’ll save and plan to buy when it makes the most sense for their finances. Homeowners will do the same; they will either refi, remodel and be content where they are for the long haul, or decide their homes no longer fit their lifestyles and their finances, divest of them and move on. But the good news is, people will make these decisions based on what is or is not sustainable for their lives and their finances, and not based on inflated hopes about what the market will or will not do.
Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
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