Not Financially Ready To Be A Brown & Brown Client Yet? Here’s A Plan For You

Posted @ 12:03 am - Filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Retirement, Mentoring, Financing, Buying Income Property, Sominex Account, Depreciation, Capital Growth, Goals, Tax Shelter, RE Investment Practice

It’s never a good day when I find it necessary to tell someone I can’t take them on as a client. Sometimes it’s ‘cuz they find themselves in quicksand and need help — but they’re too far gone. Most of the time though, it’s ‘cuz they’re under capitalized. They either want me to help them invest with 0-5% down, which I won’t do period, end of sentence, or they’ll have zip, zero, nada cash reserves to establish their Sominex Account.

As I’ve said dozens of times here, no Sominex Account means we can’t work with you. Though it’s designed to help the client sleep when Murphy makes his inevitable visit(s), it’s also there so I can sleep, know what I mean, Verne? I don’t like those weird dreams when I’m stressed.

Still, to those for whom I can’t help for this reason, and who obviously have more courage than is safe, I offer the following.

Assumption: You have enough for a 3% down payment on a purchase price of $150-400,000 or so.

Assumption: You’re willing to ah, modify your strategy. Yeah, that’s the ticket, modify.

Assumption: Either your current home can rent for enough to pay for itself, or you can afford $1-200 a month outgo if it can’t.

Assumption: You can successfully qualify for a new loan.

OK, let’s get started.

Let’s say you live in East Toilet Seat Valley somewhere in ‘The boom never got to us’ country. You own your home — as long as you keep makin’ payments. You both probably work, and might even have children. Or maybe yer single — it doesn’t matter.

The Plan I’ve worked this plan a couple dozen times over the years, and it works like a charm.

First — Establish what your current home will command in rent. Is it enough to pay your payments and expenses? Yes? Cool. No? Can you easily afford the shortage every month? Yes? Cool.

Second — Get yourself pre-qualified for an FHA loan. Tell your mortgage guy you’re buying a 2-4 unit property in which yer gonna live. You should be prepared to tell him the price ranges of these types properties. FHA loans are government insured loans — Housing and Urban Development — been around since nearly forever.

Third — Purchase 2-4 unit property, preferably 4, but whatever you can successfully find and close.

Fourth — During the escrow, AFTER you know as surely as you know the sun will set in the west that your new purchase is gonna close, rent out your current home, subject to your escrow successfully closing.

Fifth — Move in to your new home.

Assuming you bought a fourplex, the most expensive choice, here’s how it should shake out.

You’re probably living for $0-500 a month now. This will of course change from region to region and state to state, but I think the 80/20 rule applies. Also, your old home, now an investment property, is giving you a some tax shelter. Granted, it’s not as much as when you lived there, but you’ll take it, right? Thought so.

The fourplex is now giving you somewhat of a twofer. 25% +/- of the interest and taxes are directly deductible, as that’s the part in which yer now living. The remainder, (minus land value) is now adding more tax shelter due to the depreciation it spins off. So what’s happened?

You now own a rental home that’s paying for itself or close enough for horse shoes. You own a fourplex you didn’t think was even on your menu. You have more tax shelter than you’ve ever had before you did this. You’re living for 30-100% less (housing expense), less than you ever dreamed was possible.

FHA offers 97% loans at competitive fixed rates. They’ll tack on mortgage insurance, which will increase your payments a bit, but don’t whine. The whole thing probably cost you less than $10,000 from beginning to end. So if yer startin’ out with more than that, you’ve saved some for a meager Sominex Account. You can build that up relatively quickly because of your significantly lowered cost of living. You can probably go to your employer and increase your exemptions too. This will have the affect of increasing your take-home pay. You won’t owe the taxes they’re not taking out any more ‘cuz the increased tax write-offs you’re now enjoying.

Come on now — how cool is that?

In 4-8 years or so you’ll have experienced enough capital growth to do your first tax deferred exchanges. That’s right plural. Both the home and the fourplex will be sold and moved into more and better stuff. An added bonus to those sales will be the cash not subject to capital gains tax. Remember, the old home was your primary residence before you made it a rental. The increase in value between the time you bought it, and the day you converted it to income property is free — as long as you qualify under the Internal Revenue Code regs. (Most folks will.)

The fourplex sale will be 25% +/- tax free gain for you. It was your primary residence. The other 75% will be tax deferred to better property. We can’t know for sure, but you may have enough of the ‘tax free’ cash from the two sales to get another home. You would then have the best of both worlds — a home and some investment properties — separate this time.

Before you know it you’ll be flyin’ solo.

It’s at that point you’ve saved enough cash over the years to have a real live Sominex Account. When you do the sales/tax deferred exchanges, we’ll be proud to represent you and get you goin’ on the way to the retirement you deserve.

This won’t work for everyone of course, but it’ll work for a lot of people.

I’ll make you an offer.

If you think you might be able to pull this off, contact me and I’ll mentor you through it. I love this kinda stuff, so you’ll be doing me a favor. No charge whatsoever. Well, if I’m ever in your neck of the woods, yer buyin’. Fair? Cool. We’ll limit this to 10 investors as I don’t yet have the ability to manufacture time. Those for whom I think have the commitment and ability to make it happen, will have my coaching from Day 1 until Move-in Day.

By the way, you can do this even if you don’t own your own home now, and are renting. Just have the cash, decent credit, and the ability to act on your dreams.

Don’t ya just love it when a Purposeful Plan comes together?

This entry was posted on Saturday, April 26th, 2008 at 12:03 am and is filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Retirement, Mentoring, Financing, Buying Income Property, Sominex Account, Depreciation, Capital Growth, Goals, Tax Shelter, RE Investment Practice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.