Posted on December 16, 2009 @ 11:12 am - Written by BawldGuy
Two great phone calls yesterday. One about the ever present tug of war between capital growth and cash flow, the other about financing, and holding properties forever. Today I’m talkin’ about paying too much attention to obtaining high cash flow properties when the primary agenda is for capital growth. I’ll talk about the second conversation in a separate post.
What’s a cap rate?
Simple — Captialization rate is what you get when you divide the price paid for an investment (income) property into its Net Operating Income (NOI). If you paid cash it’d also be your before tax ‘cash on cash’ return rate. Example: Paid $100,000 with NOI of $8,000 = Cap Rate of 8%.
Having a 50 million dollar bill would change everything, wouldn’t it?. You’d probably buy all the super located NNN leased properties with high cap rates you could get. You’d also acquire a few 5-star mobile home parks, and/or some well located mini-warehouse storage operations. Then you’d make sure all the checks were wired to the correct bank account — which would be your management time each month. 
Furthermore, you’d acquire an EIUL, using about 10% of your $50Mil. Note: I’ll be posting on EIUL’s soon, with cool examples. Bottom line on ‘em, is that they’re a superb source of tax free income which upon death offers a payoff to your heirs not subject to inheritance taxes. Like I said, cool. Read the rest of this entry »
Posted on December 3, 2009 @ 2:28 pm - Written by BawldGuy
Just when ya think ‘they’ can’t come up with any more ways to retard any chance of a credible real estate recovery, the goobers at Freddie Mac steps up to the plate. They’ve decided, no kiddin’, to require new investors to prove they have a couple years experience in property management — or no loan. Huh? What? Am I on Candid Camera? Is Ashton Kutcher filmin’ this? Will someone from Freddie Mac jump outa da shadows shoutin’ to real estate investors ‘You’ve been punked!’? Duh doesn’t even begin to cover this silly policy. Read the rest of this entry »
Posted on November 18, 2009 @ 3:03 pm - Written by BawldGuy
As a hired gun many moons ago I used to do after tax cash flow ‘autopsies’ on investments for attorneys representing either investors or other real estate agents/brokers. I’d produce historic rates of return, almost always expressed as IRR — Internal Rate of Return. I’ve explained IRR, in court, the following way.
It’s that rate of return, which when discounted back to Day 0 equals the original amount invested. (In ‘analyst speak’ that means Net Present Value (NPV) = 0.)
The court accepted the data I was given was correct in those cases, since most of it came from escrow closing statements, CPA’s, management company reports, bank statements and the like — they were relatively reliable numbers.
In one case I was grilled for over 20 minutes about holding periods. It was literally one of the dumbest 20 minutes the judge ever had to endure going by his facial expressions. For me though it was live entertainment. Read the rest of this entry »
Posted on October 22, 2009 @ 8:18 pm - Written by BawldGuy
It’s so often true, the more we do something the more we learn — and realize how much we still might not know. I’ve been a licensed agent then broker for 40 years now, and I still, even after 33 of those years on the investment side of the business, learn something new or at least different almost weekly. I’m not nearly as smart as I was when I first started.
I’ve known about and dealt with Self Directed IRAs since around the mid-’90’s. Have clients who’ve done pretty well with ‘em — either on the cash flow side or capital growth. Don’t mistake anything I say about IRAs or their 401k cousins as an endorsement of the reason for their existence. Those who’ve read my thoughts on the topic aren’t confused about where I stand — I think they’re a scam, a bait ‘n switch con Uncle Sam thought up to get into Boomers’ Levi’s upon their retirement. Read the rest of this entry »
Posted on October 15, 2009 @ 3:25 pm - Written by BawldGuy
Let’s continue the week’s question and answer series on Self Directed IRAs.
Can I use the money in my IRA for a down payment?
The short answer is yes. As usual however, there are rules. And the congregation responded in unison with a resounding Duh!! The IRS calls certain transactions ‘prohibited’. There are many factors cited that will turn the purchase of real estate into a prohibited transaction.
First and foremost you can never commingle your personal and IRA funds. Simply do not do it. No buts, no what ifs, just don’t. Also, you will not use your IRA as collateral for your loan.
Using a broad brush, it takes three factors to create problems for yourself in terms of a prohibited transaction for your IRA. Read the rest of this entry »
Posted on October 14, 2009 @ 5:12 pm - Written by BawldGuy
Let’s continue with the basic questions most folks have about the concept of Self Directed IRA/401k/Seps. They’re pretty much treated the same, though you need to know there are well defined differences. Here we go — we’ll start where we left off for the sake of continuity.
The problem for most folks is they’ve never known this option might’ve been available to them — and for decades to boot. Between the NASDAQ crash several years ago, and the most recent Wall Street meltdown, many highly frustrated people have been on the prowl for a potential alternative. For many, this has been a pretty satisfying discovery. Also, and this often goes unsaid, the most important factor is the phrase Self Directed — folks appreciate the control. Duh
Why do the professionals I ask tell me I can’t do it? Read the rest of this entry »
Posted on October 13, 2009 @ 8:47 pm - Written by BawldGuy
Consider this the first of many, (Lord only knows how many) posts on Self Directed IRAs/401Ks — along with acquisition of real estate using them as a tax deferred vehicle. Geez, just reread that sentence, and it sounded like one of the talkin’ heads on CNBC’s many financial shows. Anywho, let’s get started.
Let’s start with the answers to a buncha basic questions.
Just what is a Self Directed IRA?
In a nutshell it means you’re in charge of what investments will be made. But there’s a caveat. Not all are created equally. Some say you’re in charge yet limit what’s on your investment menu. Pick your ‘custodian’ carefully, as there are many ways a high quality custodian can be worth their weight in gold. More on custodians later. Read the rest of this entry »
Posted on September 28, 2009 @ 6:05 pm - Written by BawldGuy
Today I’m addressing the investor interested in growing their net worth through real estate. I’m not talking about those who are investing solely for the benefit of monthly cash flow. Furthermore, there is much room for folks to disagree with what they think the #1 most abused principle might be. I think it’s this one. I’m sure it’s a frequent hot topic around the diner table in your home, right?.
Regardless of the passage of time, one of the constants remaining firmly implanted in many investors’ mindset is the idea that an investment property without abundant cash flow is to be avoided at all costs. The problem inherent with that school of thought is rooted in a few related principles, plus the difference between today’s realities and Grandpa’s memory of the way ‘it used to be’ — which in reality means to Grandpa, ‘the way it should be’.
The Principle in play: To the extent you go for growth you retard cash flow — and vice versa. Read the rest of this entry »