Part 1: The Problem I have found in my 14+ years of coaching Real Estate Professionals, that the ones who are flourishing are the ones who have mastered the “Inner Game” of lead generation. They feel confident about picking up the phone, they market themselves consistently, their pipeline is always full, and their contacts yield profitable results in Ideal Clients, so they make more money with less effort. However, if you are like most Real Estate Professionals, when you think of Lead to Generation, you probably get caught up in an "avoidance pattern", which looks something like this:
• You procrastinate
• You do busy work
• You tell yourself that you don't have enough time to prospect
• You may schedule out the time to call, but then never get around to it
• Worse yet, you may have called someone who was rude and then you feel so devastated that you recoil from from prospecting for a few days or a few weeks or a few months
If any of that sounds familiar, you are not alone and it's not your fault. I believe that there are 3 reasons why we avoid picking up the phone and calling people: 1. The fear of the unknown and the fear of rejection 2. Self limiting beliefs 3. Inner conflicts about calling Can you begin to see what lies beneath the surface of your "avoidance pattern" about making those calls?
• It's not that you are "lazy" or unmotivated…
• It's not that you don't know what to do or say…
• It's not that you don't have enough time…
...It's just that you have Fears, self-limiting beliefs and conflicts that prevent you from doing what you need to do to get your business on track, i.e. lead generation.
However, here's the Good News: you are NOT stuck with your fears, your self limiting beliefs, or your conflicts as they can all be dissolved and replaced with confidence and ease, leading you to prospect in an easy and effortless way. How do I know for sure? Because I have been coaching real estate agents for quite a few years and have seen them transform from fear about lead generation, to actually looking forward to picking up the phone and calling people to offer their services. A former client of mine, JoAnn, is a great example of someone who was burdened by beliefs that stopped her from picking up the phone. She didn't even know she had these hidden beliefs, and yet they took their toll. Even after many coaching programs, she still got nervous about making calls and she didn't know why. She would say to me "I know what I should be doing, I'm just not doing it". It turns out that JoAnn acquired many hidden self-limiting beliefs
before she met me. Again she didn't know they were there, but they included;
• "I shouldn't pick up the phone and talk to strangers"
• "I call people and bothering them"
• "If I call people I might get rejected"
• "People don't want to hear from me anyway”
Even though her business was declining and she was "broke and scared”, she could not move forward and didn't know why.
Once we discovered the old beliefs, removed them, and installed Empowered beliefs, her confidence level soared, she started making the calls she wanted to make, her income increased substantially to 35,000 a month, and at the end, she called herself "unstoppable”. Here are some of the new beliefs, that we installed in her mind:
• "I have a valuable service to offer people and they are happy to hear from me."
• "Every time I pick up the phone to call people, I attract clients who are ready, willing, able and fun."
• "The only persons approval I need is my own."
With these new beliefs solidly in place, JoAnn approaches prospecting with an optimistic and positive mindset, which yields positive results.
Part 2 : The Solution The solution is to look inside yourself and find out what it is that is blocking your success. What self-limiting beliefs you have that stop you from picking up the phone? What conflicts do have about calling people that paralyze you? Once you bring these beliefs and conflicts up to the surface, you can reprogram them to empower you, rather than stop you. The reprogramming process simply means that you release the old self-limiting beliefs you no longer need and install the empowered beliefs listed above in the example of JoAnn.
Another way that you can master the "Inner Game" of lead generation is to build up your confidence in yourself. Remember, if you don't call people up and let them know of your services, then you're forcing people to look into the phone book to find a real estate agent. Do you think that is the best way for someone to find a real estate professional? So how do you come to feel great about yourself as a real estate professional?
1. Definitely clear yourself of all self sabotaging beliefs like: “I'm not good enough" or “I don't have what it takes to succeed”
2. Another way to build up confidence about yourself, is to compile a list of what makes you a very good real estate agent. For example, are you detail oriented? Are you patient with your clients? Do you have excellent follow through? Do you have an educational approach to helping your clients? I find that when my clients really take an inventory of their skills, they realize that they are very good at what they do. When you know that, it's easy to install beliefs "I have a valuable service to offer people are happy to hear from me."
3. Part of the solution feeling of good about prospecting, is to call with the attitude that you are the "giver". Doesn't it feel good to be the giver? Don't you love giving gifts to people seeing the expression on their faces as they receive a gift? This puts you in a position of power. It's also true; you are the giver, you are the one with the real estate expertise to offer.
4. Think of the many ways that you can be perceived as the giver:
• You are calling them to let them know of the local real estate activity in their neighborhood.
• You are calling to let them know what houses have been sold in the area and what the prices are.
• You are calling to find out who they would like to have as their neighbors in the houses for sale in their neighborhood.
• You are calling to find out if they would like to have a free comparative market analysis so that when they get ready to sell, they know the price of their home.
• You are calling to give them a connection to a real estate professional so that when they need real estate help, they will already have an established connection.
5. It's very likely, that your current prospecting strategy is "catch as catch can." In other words when you have a few minutes during the day, you call a few people. The good news is that as you release your self-limiting beliefs, get rid of your fears, and restore your confidence in yourself as a real estate professional, you will be more motivated to make those calls because you know you have something valuable to offer.
Here's a tip: look at your schedule at the beginning of the week and block out a certain amount of time every morning, to do the lead generation. Generally speaking, you will want to aim eventually to be doing two hours every morning. One of the mistakes real estate agents make is to try to go from 0 to 100 or try to go from doing no prospecting to doing two hours a day and then feeling overwhelmed. You would be best off to:
• Build up to two hours a day starting with half hour increments
• Refrain from taking any incoming calls during that time
• Let any callers know from your voicemail message that you will be calling them back at a certain time
Finally, you will increase your confidence about lead generation by letting go of the belief "I shouldn't have to prospect, I should just receive referrals." Obviously, that is not the case. Even if you are receiving some referrals, in today's market it's not enough for you to reach your financial goals. I'm not saying that getting referrals is not a good thing and you shouldn't work for it. Absolutely not, do what you need to do to get referrals. But don't depend on them. Along with that, people often tell themselves "I shouldn't need to prospect, I should be able to get enough clients through open houses, farming, and social networking.” While all those strategies are good they are not enough in today's market.
In summary, today's real estate market, requires that you be proactive and let people know of the valuable services you offer. Rid yourself of your self-limiting beliefs, and fears about lead generation and you will be amongst the top percentage of real estate agents who are flourishing in today's market and will flourish in any market. As you've probably heard before, "Good real estate agents do well in any market.” Master the “Inner Game” of lead generation and even in today's challenging marketplace, you can be one of the top producers.
To get the full article, sign in to ->
Wednesday, March 31, 2010
Monday, March 29, 2010
Creative Financing
The following information will provide an overview on ways to generate creative financing to provide funding for your real estate investments. One thing to keep in mind with regards to getting a seller to agree to creative terms is that if you do not ask for it you will never really know what could have happened. If you provide compelling reasons why your request for creative financing is a Win/Win situation, you just may convince them to look outside their normal comfort zone and do the deal.
Property Express CRM
Cash is King
When it comes to having a strong negotiating position with a seller, nothing compares to telling them that you are willing to pay them cash immediately. Cash is a powerful tool and it is one way to set you apart from the many investors that may be after the same deal. There are a number of ways to ensure that you will always have the capital available to negotiate your cash deals with motivated sellers. The following sections will provide a number of possibilities.
Borrowing from Friends, Family, and Professionals
Although at first you may have concerns about approaching people you know or who are family members to discuss borrowing money from them, keep in mind you are approaching them with a business opportunity, not a handout from them. Your success in achieving the desired results with these people will depend completely on how you present your opportunity. If you sit down with them not properly prepared without having any of the obvious issues or questions worked out, you will probably walk away without the cash. However, if you put together a project plan that will include an overview and most importantly a viable exit strategy (so they know how they will get paid back) there is a good chance you will be successful.
Once you have exhibited your ability to complete these real estate transactions with the anticipated results, you will have people coming to you as an investment option.
Property Express CRM
Property Express CRM
Cash is King
When it comes to having a strong negotiating position with a seller, nothing compares to telling them that you are willing to pay them cash immediately. Cash is a powerful tool and it is one way to set you apart from the many investors that may be after the same deal. There are a number of ways to ensure that you will always have the capital available to negotiate your cash deals with motivated sellers. The following sections will provide a number of possibilities.
Borrowing from Friends, Family, and Professionals
Although at first you may have concerns about approaching people you know or who are family members to discuss borrowing money from them, keep in mind you are approaching them with a business opportunity, not a handout from them. Your success in achieving the desired results with these people will depend completely on how you present your opportunity. If you sit down with them not properly prepared without having any of the obvious issues or questions worked out, you will probably walk away without the cash. However, if you put together a project plan that will include an overview and most importantly a viable exit strategy (so they know how they will get paid back) there is a good chance you will be successful.
Once you have exhibited your ability to complete these real estate transactions with the anticipated results, you will have people coming to you as an investment option.
Property Express CRM
Buy Property using Intelligent Finance
Successful Real Estate Investors understand the need to have capital available in order to pursue investments that will allow for their continued business growth. However, this capital does not have to come from their own personal or business funds. The savvy Investor will use every method possible in order to get the most creative financing terms that will benefit them. Some of following methods will actually allow you purchase a property with little or no money down.
Warning
Due to the nature of putting creative deals together that may not conform to traditional lending procedures, it is strongly recommended to have your Attorney review any agreements or contracts in advance of you signing them. This will ensure your best interests are being protected.
Property Express CRM
Warning
Due to the nature of putting creative deals together that may not conform to traditional lending procedures, it is strongly recommended to have your Attorney review any agreements or contracts in advance of you signing them. This will ensure your best interests are being protected.
Property Express CRM
Match the Investment Approach with your Appetite for Risk
Real estate investing is considered one of the best methods for building wealth by millionaires around the world. It can be very high on reward, but also includes a factor of risk. It comes in many forms, and you need to choose the one which fits your finances, interests, and acceptable risk levels. Here are a few of the most common forms of real estate investing.
1. Commercial - Owning properties which you lease or rent to other businesses can often be one of the more secure forms of real estate investing. You will need deep pockets to get started, since most commercial properties carry a sizable price tag. Once you fill a property with tenants your turn over is normally very low. Businesses are hesitant to move. They want their clients to be able to find them, and to establish a level of permanency. Your risk increases with a downturn in the economy, when you may lose businesses, and have a difficult time replacing the tenants.
2. House Flipping - This high reward, high risk form of real estate investing has become very popular, and competitive. In this form of investing, you need to find below market value properties, which can be repaired, renovated, and sold for a substantial profit at normal market prices. In a booming housing market you have high potential for profits. In a decreasing market, you need to take extra caution to buy wisely, budget tightly, and sell quickly.
3. Residential Rental Properties - There are always people needing places to live who cannot afford, or do not qualify for a home loan. While residential rental properties do not carry the glitz and glamor of some other methods of investing, it is one of the safest and surest ways to increase your wealth over time. You need to carefully figure all your costs, potential income, and plan for the long term.
4. Rent or Lease to Own Properties - This is similar to rental, but with higher monthly payments from the tenants. Part of the tenants monthly payments is going towards buying the home. These tenants are often more concerned with keeping their properties in top condition, since they are planning to own it in the future. If they move away before completing the purchase, you still own the property, and likely have less repairs to make before the next tenant moves in.
5. Pre-Construction - This is a highly speculative area of real estate investment. You are gambling the city will continue to expand, and your property will be where they come. This can be a very high profit form of real estate investment in the right communities, which are experiencing rapid growth. In a rapid market downturn, or economic changes in the community, these investments can lead to major losses.
Real estate investment is one of the most sound, and reliable ways to increase you wealth. Understanding the risks and making good decisions is the best way to keep your investments increasing in value, and avoiding loss.
Finding the right investment rental property is often a challenge. Even when you find a possible investment property, you must evaluate it carefully and not just jump on the first opportunity, or you may risk possible losses, or low income. Here is a short list of suggestions for finding investment property, and evaluating your purchase.
1. Choose whether you want to search on your own for rental properties, or whether you want to use a broker. Brokers are very likely to know about investment rental property which is going on the market long before a sign goes up, or an advertisement hits the paper. A good broker will also be able to advise you about the market values in the neighborhood, and comparable properties in the area.
2. Just because a property is not listed, does not mean it is not for sale. Call the rental number for the apartment complex, and get the owner's phone number. Call and ask if he is planning to sell the unit. Especially if he is from out of the area, he may be tired of dealing with issues remotely, and is ready to make a deal.
3. Before you even locate your first investment rental property, you should make sure all of your finances and credit are in order. Mortgage companies, banks, and lenders will be thorough in checking your credit before agreeing to the investment in the property. Checking your own credit scores and reports will allow you to fix any problems ahead of time, rather than experiencing a nasty surprise.
4. Whether you are using a broker or not, you need to research the local market. How are house prices in comparison to rent? How much do other apartment units rent for in the area? If house prices are low, you may find your renters are quickly departing to buy homes. If house prices are high, the demand for rentals will stay high. You need to make sure the rent you are planning to charge is comparable to similar properties, and will allow you sufficient profit. Make sure to figure a vacancy rate of 10% or higher into your calculations.
5. Do you want an apartment complex which requires renovations, or one which is up to date and ready for action? While an older apartment complex may appear to save you money, you need to consider the potential costs. What repairs will be needed? How much will renovation cost? Will the renovations allow you to raise rent prices to cover the added cost? Often you will find an older apartment complex in need of repairs can become very expensive, once you factor in all the costs to bring it up to date. Make sure to have an inspection of the property done, by a professional. You want to know about every possible code violation, needed repair, and surprise problems you were not aware of. Only with a thorough inspection can you get a true cost of ownership of for the property.
Just because you are anxious to make an investment, do not run blindly forward. Take the time to evaluate carefully, and buy the perfect property. It may take a little more time and effort, but in the end, your income and happiness will be rewarded greatly.
Property Express CRM
1. Commercial - Owning properties which you lease or rent to other businesses can often be one of the more secure forms of real estate investing. You will need deep pockets to get started, since most commercial properties carry a sizable price tag. Once you fill a property with tenants your turn over is normally very low. Businesses are hesitant to move. They want their clients to be able to find them, and to establish a level of permanency. Your risk increases with a downturn in the economy, when you may lose businesses, and have a difficult time replacing the tenants.
2. House Flipping - This high reward, high risk form of real estate investing has become very popular, and competitive. In this form of investing, you need to find below market value properties, which can be repaired, renovated, and sold for a substantial profit at normal market prices. In a booming housing market you have high potential for profits. In a decreasing market, you need to take extra caution to buy wisely, budget tightly, and sell quickly.
3. Residential Rental Properties - There are always people needing places to live who cannot afford, or do not qualify for a home loan. While residential rental properties do not carry the glitz and glamor of some other methods of investing, it is one of the safest and surest ways to increase your wealth over time. You need to carefully figure all your costs, potential income, and plan for the long term.
4. Rent or Lease to Own Properties - This is similar to rental, but with higher monthly payments from the tenants. Part of the tenants monthly payments is going towards buying the home. These tenants are often more concerned with keeping their properties in top condition, since they are planning to own it in the future. If they move away before completing the purchase, you still own the property, and likely have less repairs to make before the next tenant moves in.
5. Pre-Construction - This is a highly speculative area of real estate investment. You are gambling the city will continue to expand, and your property will be where they come. This can be a very high profit form of real estate investment in the right communities, which are experiencing rapid growth. In a rapid market downturn, or economic changes in the community, these investments can lead to major losses.
Real estate investment is one of the most sound, and reliable ways to increase you wealth. Understanding the risks and making good decisions is the best way to keep your investments increasing in value, and avoiding loss.
Finding the right investment rental property is often a challenge. Even when you find a possible investment property, you must evaluate it carefully and not just jump on the first opportunity, or you may risk possible losses, or low income. Here is a short list of suggestions for finding investment property, and evaluating your purchase.
1. Choose whether you want to search on your own for rental properties, or whether you want to use a broker. Brokers are very likely to know about investment rental property which is going on the market long before a sign goes up, or an advertisement hits the paper. A good broker will also be able to advise you about the market values in the neighborhood, and comparable properties in the area.
2. Just because a property is not listed, does not mean it is not for sale. Call the rental number for the apartment complex, and get the owner's phone number. Call and ask if he is planning to sell the unit. Especially if he is from out of the area, he may be tired of dealing with issues remotely, and is ready to make a deal.
3. Before you even locate your first investment rental property, you should make sure all of your finances and credit are in order. Mortgage companies, banks, and lenders will be thorough in checking your credit before agreeing to the investment in the property. Checking your own credit scores and reports will allow you to fix any problems ahead of time, rather than experiencing a nasty surprise.
4. Whether you are using a broker or not, you need to research the local market. How are house prices in comparison to rent? How much do other apartment units rent for in the area? If house prices are low, you may find your renters are quickly departing to buy homes. If house prices are high, the demand for rentals will stay high. You need to make sure the rent you are planning to charge is comparable to similar properties, and will allow you sufficient profit. Make sure to figure a vacancy rate of 10% or higher into your calculations.
5. Do you want an apartment complex which requires renovations, or one which is up to date and ready for action? While an older apartment complex may appear to save you money, you need to consider the potential costs. What repairs will be needed? How much will renovation cost? Will the renovations allow you to raise rent prices to cover the added cost? Often you will find an older apartment complex in need of repairs can become very expensive, once you factor in all the costs to bring it up to date. Make sure to have an inspection of the property done, by a professional. You want to know about every possible code violation, needed repair, and surprise problems you were not aware of. Only with a thorough inspection can you get a true cost of ownership of for the property.
Just because you are anxious to make an investment, do not run blindly forward. Take the time to evaluate carefully, and buy the perfect property. It may take a little more time and effort, but in the end, your income and happiness will be rewarded greatly.
Property Express CRM
Tuesday, February 23, 2010
Can you conduct a BOE?
A fast back-of-the-envelope (BOE) calculation can help investors decide whether to proceed with a potential property renovation project or whether to walk away
A BOE will quickly show you if there's money to be made from an investment, or if you've entered a no go zone - that the property you're looking at is never going to make money.
Some of our best deals are those we've walked away from thanks to the BOE.
So what should you include in your BOE?
First, you need to work out the cost of buying and renovating the property. We advocate that your renovation costs should be less than 10 per cent of the purchase price.
When calculating costs, make sure you include stamp duties, insurance, bank interest during the renovation, contingencies in case of delays and marketing costs if you intend to sell when you're finished. In the latter case, you should also make allowances for tax.
You then plan what you'll do with the property. Let's say you'll add value by creating an extra bedroom under the existing roofline. You'll polish the floors, paint inside and out, replace the kitchen and re-tile the bathroom.
With that in mind, research the value of properties in the area of comparable standard to the project you intend to complete.
The BOE will tell you if you're buying a renovator or a ruin-maker..
Download my Property Analysis Tool for more detailed cashflow analysis.
A BOE will quickly show you if there's money to be made from an investment, or if you've entered a no go zone - that the property you're looking at is never going to make money.
Some of our best deals are those we've walked away from thanks to the BOE.
So what should you include in your BOE?
First, you need to work out the cost of buying and renovating the property. We advocate that your renovation costs should be less than 10 per cent of the purchase price.
When calculating costs, make sure you include stamp duties, insurance, bank interest during the renovation, contingencies in case of delays and marketing costs if you intend to sell when you're finished. In the latter case, you should also make allowances for tax.
You then plan what you'll do with the property. Let's say you'll add value by creating an extra bedroom under the existing roofline. You'll polish the floors, paint inside and out, replace the kitchen and re-tile the bathroom.
With that in mind, research the value of properties in the area of comparable standard to the project you intend to complete.
The BOE will tell you if you're buying a renovator or a ruin-maker..
Download my Property Analysis Tool for more detailed cashflow analysis.
When selling, presentation trumps renovation
Property sellers are better to concentrate on the presentation of their home rather than trying to renovate before they sell.
Renovators risk overcapitalising unless they know what they're doing, recalling one home where the owner spent $60,000 putting in a new pool, hoping it would boost her sale price substantially. She only received $30,000 more for the property.
The most financially successful jobs are smaller-scale, lower-cost renovations that improve the exterior appearance of homes.
Street appeal is king. Many people do a 'drive by' before looking inside. It's much easier to sell a house that looks good on the outside than vice versa. People make up their mind before they get to the front door whether or not they like a property.How the property looks from the outside is more important than ever.
A great-looking facade will increase the positive experience when the buyer is making enquiries.
I recommend the following five tips for anyone thinking about renovating before listing their home for sale:
1. It's better to focus on presentation rather than renovation. Getting professional advice from a property stylist will give a better result.
2. Simple things like moving furniture, extra lighting, adding artwork and cushions will improve resale value.
3. Renovations will always cost more and take longer than you budget for.
4. Don't just design what you like. If the idea is to sell it at the end, you must cater for the local market.
5. Talk to a local real estate agent to find out what price bracket you should keep the final product under (i.e. don't overcapitalise).
Download my latest guide on Landlord Best Practice
Renovators risk overcapitalising unless they know what they're doing, recalling one home where the owner spent $60,000 putting in a new pool, hoping it would boost her sale price substantially. She only received $30,000 more for the property.
The most financially successful jobs are smaller-scale, lower-cost renovations that improve the exterior appearance of homes.
Street appeal is king. Many people do a 'drive by' before looking inside. It's much easier to sell a house that looks good on the outside than vice versa. People make up their mind before they get to the front door whether or not they like a property.How the property looks from the outside is more important than ever.
A great-looking facade will increase the positive experience when the buyer is making enquiries.
I recommend the following five tips for anyone thinking about renovating before listing their home for sale:
1. It's better to focus on presentation rather than renovation. Getting professional advice from a property stylist will give a better result.
2. Simple things like moving furniture, extra lighting, adding artwork and cushions will improve resale value.
3. Renovations will always cost more and take longer than you budget for.
4. Don't just design what you like. If the idea is to sell it at the end, you must cater for the local market.
5. Talk to a local real estate agent to find out what price bracket you should keep the final product under (i.e. don't overcapitalise).
Download my latest guide on Landlord Best Practice
Tuesday, February 9, 2010
Isn’t Rehab and Keep It the smarter option?
I got this great question from a member of my discussion board. The question went something like this;
Why keep property after it’s rehabbed? Why not just sell it after the rehab and GET PAID!
Well, it depends, like so many things. It will come down to an investor’s decision.
I want to present a different way of thinking about this decision. My position is essentially this: If you don’t have an urgent need for quick cash, you’ll make more money by hanging onto the property. In most cases you can generate the most short term cash by selling a pretty, like new, rehabbed house. There are downsides though, such as giving much of it away in taxes come next April.
If you keep it, you stand to make quite a bit more! In addition, you get to enjoy some killer benefits such as a tax break, cash flow, and a nice payday once you eventually sell the property thanks to natural appreciation. Most times you stand to make some cash within a few months of buying the property when you refinance the property out of your hard money (at 70% loan-to-value) to long term financing (at 85% or 90% loan-to-value). Refinancing will have to wait until after you’re finished with the rehab, and most lenders insist on it being occupied by a renter before approving the refinance.
As you’ll see in the below example, a rehab real estate investor will make considerably more by holding onto a property. But, it’s not all wine and roses. You have to be a landlord, and you have to decide if you want to do that. Some folks refuse to be a landlord. I personally think it can be done correctly on my own, or I can hire someone to do the day-to-day administration. The difference in money over time is substantial enough that it behooves me to figure out how to landlord, or hire someone to do it for me.
Let me illustrate the difference in profit between rehabing and selling, and rehabbing and renting types of investing with an example;
First we have to make some assumptions. Let’s assume appreciation is 5% in your area and the average price of a rehabbed property is $100,000. Let’s also assume there are two real estate investors named John and Mike.
John sells his properties right after rehabbing and makes around $15-18,000 per house.
Mike hangs onto his rehab projects and cash-out refinances, and usually pulls out $10,000 per house within 3-6 months of owning. (Mike trades his 70% loan-to-value (LTV) ratio hard money for long term, 30-year mortgages at a lower interest rate with an 85-90% loan-to-value ratio. The difference between what it costs him to pay off the hard money and the new mortgage goes into his bank account. (Again, around $10,000 per property.)
John (rehab and sell) makes a great living by all standards. Ten houses per year is $150,000-$180,000 per year…nice cash! The downside is that John has to maintain a steady flow of rehabbed properties to maintain his standard of living year-after-year. He also pays taxes on all that money as regular income (ouch!) because of the short time he owns them… So his $150,000 per year is somewhat less after the IRS takes their cut.
Mike (the rehabber) makes a great living as well. Ten houses per year nets him $100,000 in tax free, spendable cash. Mike controls a million dollars in real estate and it’s going up in value as time passes. Mike pays no taxes on that money he nets from the cash-out refinances. Since it’s part of a mortgage, it must be paid back eventually and it not considered income! That’s the best part!
Let’s look at what Mike’s doing year-by-year.
If Mike bought 10 houses this year valued at $100,000 each, he owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate…which is pretty conservative):
Purchase year – 10 houses x $100,000 = $1,000,000
Year 1 – Same 10 houses X $105,000 = $1,050,000
Year 2 – Same 10 houses X $110,250 = $1,102,500
Year 3 – Same 10 houses X $115,762 = $1,157,620
Year 4 – Same 10 houses X $121,550 = $1,215,500
Year 5 – Same 10 houses X $127,627 = $1,276,270
Essentially, Mike makes an extra $50,000 per year for hanging onto and renting 10 properties. That’s almost like making $50,000 for waking up! If he sells them after 5 years of ownership, he puts $276,000 in his pocket.
Things to keep in mind with this example…
• There are areas of the country that appreciate much faster than 5%. Some areas will double in value in the next 5 years!
• I did not include the tax advantages of owning an extra ten homes in this example. That equates to thousands of dollars in real income each and every year.
• This example runs the numbers for a single ten-house year. What if you want to “top out” at owning 40 properties. In a few short years your buying can slow down to a trickle and you can start selling and cashing out of properties. How many ten-house years to you need before you have attained your financial goals?
• Forget the 5 year hold. What if you hold these houses 10 years? The numbers get pretty crazy!
I don’t want to work forever. You probably want to reach a point where you won’t HAVE to do too much unless you want to. If so, holding properties for a few years makes a lot of sense, especially if you don’t have much personal money invested in them.
So what of John? I suspect that John will come around and start holding properties once he satisfies his urgent need for cash.
To try my latest Property Software or to become an Affiliate goto Property Pro
Why keep property after it’s rehabbed? Why not just sell it after the rehab and GET PAID!
Well, it depends, like so many things. It will come down to an investor’s decision.
I want to present a different way of thinking about this decision. My position is essentially this: If you don’t have an urgent need for quick cash, you’ll make more money by hanging onto the property. In most cases you can generate the most short term cash by selling a pretty, like new, rehabbed house. There are downsides though, such as giving much of it away in taxes come next April.
If you keep it, you stand to make quite a bit more! In addition, you get to enjoy some killer benefits such as a tax break, cash flow, and a nice payday once you eventually sell the property thanks to natural appreciation. Most times you stand to make some cash within a few months of buying the property when you refinance the property out of your hard money (at 70% loan-to-value) to long term financing (at 85% or 90% loan-to-value). Refinancing will have to wait until after you’re finished with the rehab, and most lenders insist on it being occupied by a renter before approving the refinance.
As you’ll see in the below example, a rehab real estate investor will make considerably more by holding onto a property. But, it’s not all wine and roses. You have to be a landlord, and you have to decide if you want to do that. Some folks refuse to be a landlord. I personally think it can be done correctly on my own, or I can hire someone to do the day-to-day administration. The difference in money over time is substantial enough that it behooves me to figure out how to landlord, or hire someone to do it for me.
Let me illustrate the difference in profit between rehabing and selling, and rehabbing and renting types of investing with an example;
First we have to make some assumptions. Let’s assume appreciation is 5% in your area and the average price of a rehabbed property is $100,000. Let’s also assume there are two real estate investors named John and Mike.
John sells his properties right after rehabbing and makes around $15-18,000 per house.
Mike hangs onto his rehab projects and cash-out refinances, and usually pulls out $10,000 per house within 3-6 months of owning. (Mike trades his 70% loan-to-value (LTV) ratio hard money for long term, 30-year mortgages at a lower interest rate with an 85-90% loan-to-value ratio. The difference between what it costs him to pay off the hard money and the new mortgage goes into his bank account. (Again, around $10,000 per property.)
John (rehab and sell) makes a great living by all standards. Ten houses per year is $150,000-$180,000 per year…nice cash! The downside is that John has to maintain a steady flow of rehabbed properties to maintain his standard of living year-after-year. He also pays taxes on all that money as regular income (ouch!) because of the short time he owns them… So his $150,000 per year is somewhat less after the IRS takes their cut.
Mike (the rehabber) makes a great living as well. Ten houses per year nets him $100,000 in tax free, spendable cash. Mike controls a million dollars in real estate and it’s going up in value as time passes. Mike pays no taxes on that money he nets from the cash-out refinances. Since it’s part of a mortgage, it must be paid back eventually and it not considered income! That’s the best part!
Let’s look at what Mike’s doing year-by-year.
If Mike bought 10 houses this year valued at $100,000 each, he owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate…which is pretty conservative):
Purchase year – 10 houses x $100,000 = $1,000,000
Year 1 – Same 10 houses X $105,000 = $1,050,000
Year 2 – Same 10 houses X $110,250 = $1,102,500
Year 3 – Same 10 houses X $115,762 = $1,157,620
Year 4 – Same 10 houses X $121,550 = $1,215,500
Year 5 – Same 10 houses X $127,627 = $1,276,270
Essentially, Mike makes an extra $50,000 per year for hanging onto and renting 10 properties. That’s almost like making $50,000 for waking up! If he sells them after 5 years of ownership, he puts $276,000 in his pocket.
Things to keep in mind with this example…
• There are areas of the country that appreciate much faster than 5%. Some areas will double in value in the next 5 years!
• I did not include the tax advantages of owning an extra ten homes in this example. That equates to thousands of dollars in real income each and every year.
• This example runs the numbers for a single ten-house year. What if you want to “top out” at owning 40 properties. In a few short years your buying can slow down to a trickle and you can start selling and cashing out of properties. How many ten-house years to you need before you have attained your financial goals?
• Forget the 5 year hold. What if you hold these houses 10 years? The numbers get pretty crazy!
I don’t want to work forever. You probably want to reach a point where you won’t HAVE to do too much unless you want to. If so, holding properties for a few years makes a lot of sense, especially if you don’t have much personal money invested in them.
So what of John? I suspect that John will come around and start holding properties once he satisfies his urgent need for cash.
To try my latest Property Software or to become an Affiliate goto Property Pro
Subscribe to:
Posts (Atom)
