Posted on August 19, 2008 @ 10:27 pm - Written by BawldGuy
Just how does a real estate investor grow their capital in a stagnant market? Let’s first look at what it takes, lookin’ at the big picture. The first assumption is your market isn’t goin’ up in value. Also, you’re convinced it’s not likely to go up much at all over the next several years. What constitutes a stagnant market changes depending upon whom you’re asking. San Diego real estate investors would, ’till recently, turn their collective nose up at only 5-8% annual appreciation.
In many markets, most in fact, property values are simply not movin’ up. In fact, if they’re holding their value, owners are learnin’ to claim that as a moral victory. Tonight is for the stubborn cusses who won’t leave town with their capital ‘cuz any property not managed by their hands on, ‘control issue’ selves will die a gory death. 
Here’s what the competition looks like. Prudently leveraged buys in growth regions. Even with what I call Grandpa’s Leverage, the capital growth rate at just 5% yearly will hit around 8% give or take for a five year hold. That’s sans before and after tax cash flows — only value increase + the loan’s principal reduction was used. (Hey, I said simple.) That means your capital growth rate upon executing a tax deferred exchange at the end of year five would probably exceed 10% annually. That would be after tax, or to be really picky, after ‘deferred’ tax.
Tonight let’s touch on controlling property through long term lease/options. Read the rest of this entry »
Posted on August 18, 2008 @ 10:59 pm - Written by BawldGuy
You know the kinda place I’m talkin’ about. I joke about it all the time. Around here it’s known as East Toilet Seat, Wisconsin. Buy an income property there, and five years later it’s either worth the same, or gone up just enough to pay the costs of selling, and break even. Like I said, slloooow. This is why we do so well with investors in those type areas, ‘cuz folks often have capital but no place for it to grow. We make it easy for them to export their hard earned investment capital safely. Makes plenty of sense, but not everybody wants to travel that road. They’d rather stay local. For most that’s a huge long term mistake in those kinda markets. Why? ‘Cuz you’re forced to grow your capital almost exclusively through expertise, technique, and courage.
Therefore, in those markets, any strategy relying upon appreciation in general should be discarded out of hand. It’s a failure just achin’ for a sucker to grab hold.
If it can be reasonably assumed an area won’t exceed 1-2% annual appreciation, here’s what the real estate investor’s lookin’ at.
Buy at $200,000 and hold for about five years at 2% annual appreciation. In those five long years you made a whole $21,000 — and I rounded up. After sales costs you can take the family for a week’s vacation to lovely Lemon Grove, California — just a $4 cab ride away from the famous Lips. Read the rest of this entry »
Posted on August 14, 2008 @ 9:14 pm - Written by BawldGuy
Until the last couple years, our clients, for the most part, have been able to acquire their investment real estate without paying loan points. As change in the markets took hold, things began to change. How’s that for understatement? The lender problems emerged big time. Underwriting changed even more, and lenders changed the way they viewed investor loans. To all this you may all now roll yer eyes while in unison saying, Duh. I know, I know. When yer used to no points and read closing statements these days, it can be chilling.
How ’bout goin’ from loan fees totaling less than $2,000 for a fourplex purchase, to $5,000 sans processing for a duplex? Ouch and a half.
Yesterday we learned investor loan costs have risen — again. My response?
So what.
Real estate investing is, in so many ways almost perfectly analogous to baseball, the perfect sport. (And no, we’re not gonna waste time debating that assertion, as there’s no point in doing so.) And the first rule in baseball is the same as in real estate investing:
There’s no crying. Read the rest of this entry »
Posted on August 12, 2008 @ 8:59 pm - Written by BawldGuy
In a recent post, I promised I’d get David Shafer over here to give you some ideas about what a real estate investor might do with cash flow, both before and after taxes. Dave not only stepped up to the plate, he’s knocked another one outa da park. It’s always driven me nuts the folks view their cash flow as ‘date night’ money, or vacation spending dough, etc. When I used to teach seminars on cash flow analysis, one of the crucial factors was dealing with cash flows during holding periods. Think big picture.
The next time temptation pulls at you to grab yer cash flow and go out on the town, think about this post. That juicy, perfectly broiled steak yer about to enjoy? Hope is was good, ‘cuz it coulda cost you a million bucks. ‘Course, it is your money, right? It’s your retirement too. Know what an extra Mil is worth in retirement income? $50-80,000 a year, easy. And that doesn’t take into account the extra properties that woulda been added to the portfolio along the way. Oops, there’s another million. The treatment of cash flow over the long haul can either be beneficial to your retirement, or medium rare. Your choice. The results of wisely reinvesting cash flows over time can be like world class cheesecake for dessert.
Again, that steak better be sent from Heaven. OK, enough. Here’s David Shafer, someone I respect and admire. This is good stuff people. Read the rest of this entry »
Posted on August 7, 2008 @ 10:52 pm - Written by BawldGuy
Due to the nature of tonight’s topic, pictures will again be at my whim. I’m feeling quite random as it turns out. When I’m talkin’ ’bout numbers and basic analysis on-topic pictures just don’t cut it.
A post published here earlier this week generated an excellent comment by David Shafer.
The post discussed the differing results of 10% or 20% down payments.
Here’s David’s comment:
I argue with myself over which is better the 10% or 20% version. I think it is really individualized. But gotta comment that the 20% version is less costly in terms of lower mortgage rate and/or no mortgage insurance which is expensive now. And if you take that cash flow and put it into another investment, then you might just come out even with the 10% down option!
Dave — I know what you mean, as I’ve done this particular analysis hundreds of times.
These days we’re seeing little or no difference in interest rates on the two loan LTV’s. Even if there was a .25% spread, if that kills the deal, then generally speaking the investor might not be a candidate for real estate at that time. ‘Course sometimes common sense dictates a particular deal just won’t work.
Let’s look at your suggestion though, which might be a logical alternative. Read the rest of this entry »