Real Estate Retirement Investing Part 1: Sunday Morning Thoughts 02 September 2012

With the recent economic downturn many people have seen their retirement almost go up in smoke. From 401k to savings accounts to buying stocks and bonds, this recession-depression has taken its toll on all investments. Many people who have already entered into retirement have noticed the sharp decrease in the money they use to have.

Racking their brains with, how long will my funds last? Can I sustain my lifestyle?

So how do you recoup your retirement in a down turn economy?

The easy answer, make better investments.

Money market and 401k accounts depend on a fund manager to make decisions for you for a certain type of product. So if the fund is invested in for instance, green energy or emerging markets then that’s the only type of investment the fund is allowed to invest in, without regard of market performance.

So if another type of investment would prove to be more lucrative for you, the fund manager is not allowed to change the investment strategy but is bound to the specific type of fund investments.

So, you will never receive a call telling you that there is a better investment on the horizon. This is why many funds can be poorly producing funds when compared to individuals who invest in stocks on their own.
But what about investing in real estate?

Some people believe that real estate investing is a thing of the past and has seen its prime, but as long as there are people on earth, real estate will always remain a sound investment.

Related articles

• What’s Your Investing Strategy: Sunday Morning Thoughts 19 August 2012 (backedbyrealestate.com)
• What Is A 401k Retirement Plan? (answers.com)
• 5 Mid-Year Tuneups for Your 401k (bargaineering.com)
• Jill on Money: Index funds, retirement, inheritance (cbsnews.com)

Minimizing Risk in Real Estate Investing

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In real estate investing as with any investment, risk is a factor.  Minimizing risk entails covering the downside and investing in a deal which makes sense.

Real Estate investing ranges from Single Family Residence(SFR), 2-4 units, 5+units multi-family, apartment building complexes, office space, mixed use, land, and agriculture.  Each type of investment has a built-in downside, or does it?

When real estate investing, a great investor falls in love with the numbers, not the property.  So the type of real estate should not matter as much as the numbers.  Stock investing and real estate investing are alike in this respect.  You can like a business but if the businesses stock is non-producing or poor producing stock investors are less likely to invest in it.

In real estate investing if the area is mostly abandoned buildings most real estate investors are less likely to invest in the area, although these non-producers may actually be diamonds in the rough.  We will save that for a future post regarding emerging and re-emerging areas.

Food For Thought, which investment poses less risk?

•      A SFR which needs rehab and is unoccupied in a middle class area with only a few houses for sale.

•      A 60% occupied 28 unit apartment complex where the owner cannot take it any longer.  It being the tenants.  With minimal   rehab necessary.  In a middle class area with a low vacancy rate.

•       A strip mall with 10 spaces total but only two are occupied, and the surrounding area has many vacancies of this type.

The less risk is the apartment complex.  60% occupancy in an area with few vacancies indicates mismanagement of this particular complex.  The SFR, well it does make a return but not until after rehab and finding a buyer or leasee.  As for the office space, find out why the businesses are moving out of an area.  It could be that jobs are moving to another area, or the main employer has moved out-of-town.

But each possible investment has it’s own upside and downside   too numerous to mention in a short post.  There are more things to consider for each type of property, but when faced with a choice, choose the one with the best numbers and advantages to maximize profitability.

Private Lending Tips: Sunday Morning Thoughts 15 May 2011

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So you have decided to become a private lender.  You have considered many options on the types of deals you will choose to provide lending.  You understand that private lending is not a REIT, but is more like being the bank.  There are things you should keep in mind when private lending.  This is a short list given in a series of posts.  As you become more familiar with lending you will without a doubt make a few additions to the list for yourself.

Cost of Money

Level of Risk

What to do when a loan goes bad

Profit/ Return on your investment

Cost of Money:  How much is money costing you as a borrower?

You should not use your life savings.  This should not even be considered as a viable option.  Keeping a reserve is even a strategy Warren Buffett utilizes.  Answer a basic question-how much can you afford to lend and at what cost?

Borrowing to lend is a viable strategy; many people use the leverage of other people’s money to make money.  An example, a homeowner buys a house then takes out a second mortgage to pay off credit cards, cars, and to free up currency.  They are making payments on the second mortgage but are saving money in interest and possibly receiving tax advantages.

You can use a line of credit if you own something which can be used as collateral, such as a house, property, etc.

Using your IRA is also an option.  When using your IRA the profit goes back to the IRA aiding in the building of your future savings.  With an IRA you are using the money in the IRA versus borrowing against the IRA.   For more on IRA account usage please read our past post.

What is important to remember, how much interest you are paying on the money you are borrowing, and then subtract that from the interest you will gain from the lending.

For example you are the private lender, and are looking to earn passive money.  You do not wish to own the property but would like an investment with a decent return, something better than a CD.  You find an Investor who has a deal which needs funding.  The investor offers you 8% interest on terms for the use of your money to quickly close a profitable deal.

For arguments sake, let’s say you as the private lender decide to use a line of credit from your property to fund the deal.  Always remember you will be responsible for the repayment of the line of credit.  The investor as a borrower from you is responsible to repay the loan you are extending to fund the deal. If the bank gives you a line of credit with 4% interest and you loan the money to the investor at 8% interest you will have made a 4% earning on the difference in loans.

In short borrow for less interest than you loan.

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Will the Real Estate Market continue to Decline?

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We are currently in the eye of the storm of impending foreclosures.  The foreclosure pace has seen a slowing in the past few weeks and will slow even more in the coming weeks.

For November the decline was caused by the robo-signing scandal which forced lenders to slow the roll of foreclosures until they made sure all of the blank spaces were filled and all sentences made sense.  The triple checking of paperwork caused a slow down in foreclosures.  Many people on the chopping block were given a temporary reprieve.

Starting on the 20^th of December banks will get into the holiday spirit, and halt foreclosures for the last two weeks of the year.  But then promptly restart foreclosures on the 3^rd of January.  These factors contribute to what will look like a slowing in foreclosures for the end of the year, then January will see a hard spike in foreclosures due to the catching up by the banks.

What impact will this have on property values?

Property values for the end of December will flat line then in January; there will be a decline due to a housing surplus from lenders proceeding with foreclosures.  The robo-signing scandal did have a positive impact on property values.  With lenders going at a slower pace, making it appear that the overall inventory was shrinking.

Once the banks begin to pick up the foreclosure pace again we will see another decline in property values.

This is great for buyers but sellers in areas where pre-foreclosures and foreclosures are on the rise, the value of the property may suffer.

How can this benefit a private lender??

Even with a decline in property values a private lender may still make a profit in a real estate venture.  Lending on commercial property– people who have been foreclosed on will need to rent a place- or lending on a single family residence then taking quarterly, monthly, or a one time payment depending on the situation of a particular property.  So even in a down market you can still realize a return.  Visit our website to learn and possibly earn more  http://www.BackedByRealEstate.com

Arbitrage and Real Estate: Sunday Morning Thoughts 14 November 2010

Arbitrage by definition: The practice of taking advantage of a price difference between two or more markets striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

And there you have it, a way of making money in real estate in a nutshell, now let’s crack it open and see what’s inside.

An example of simple arbitrage and real estate, making money on the difference as a private lender, would be if you did not have the funds but you have a wealthy Uncle with the funds.  The Uncle loans you the money at 2% simple interest then you loan the money to an investor with the collateral being real estate at 8% simple interest.  Not a bad investment.  Your Uncle loaned you the money as a personal loan then you in turn loan the money on a collateralized investment.  The difference of 6% simple interest is your profit.  This is how easy arbitrage works.

Now let’s look at arbitrage with your own credit abilities if the rich Uncle does not pan out.

There are many types of credit you can utilize to perform arbitrage.

Line of Credit from a property you currently own. You use the line of credit which has a low-interest rate then invest in a property as a private lender gaining a profit from the difference in interest.  You can pay a line of credit with the line of credit (read the fine print from your lender to make sure).  You may also have tax benefits, consult an accountant for the specific in’s and out’s.

Credit Offers in the mail, the best ones are the interest free for 12 months or longer.  But be careful to read the fine print, make sure the creditor is not charging a fee for using the credit.  Also make sure the investment you are lending on can be liquidated before the interest begins from the credit offer.  With the use of this type of credit, payments would have to be made, so make sure you can cover the monthly payments with either payments from the loan or from your own source of funds.

Credit Cards you currently have.  Credit card companies send convenience checks to some of their customers from time to time.  Occasionally the use of the check may or may not be interest free for a period of time.  But beware some of the check offers charge a fee, which may be a percentage of the value of the check.

Obtaining a regular personal loan, this may not give you the best arbitrage but as long as there is a difference in interest in your favor then you still have arbitrage.  A personal loan normally will have a specific limit with a payment schedule, so monthly payments are something to be considered.

Which ever way fits your situation arbitrage is a way a private lender can make money in real estate with minimal use of your own liquid funds.  You can make a profit on lending the funds and make a profit on the use of the funds.  So even if you are just thinking about becoming a private lender.

 

Weak New Homes Sales

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Most people would not understand that this news is good from an investor’s standpoint.  With new home sales being at all time lows, new home construction will also be at all time lows.  In fact the August sales were the third lowest level since the Commerce Department started tracking new home sales in 1963.

 

What this means foe investor’s, homes going into foreclosure or already foreclosed in strong markets will be sought after investments.  Banks are making the rules of lending more stringent than in the recent past and now people who would have once qualified will have a hard time qualifying for conventional financing.

 

In other words, this is the time to be a private lender.  The interest rates on other investments are low to almost non existent, CD’s, money markets, even tried and true stocks are having issues of less than stellar returns.  Diversifying a portfolio with real estate investments is a great option to the weak gains in other investments.

 

At this time the most viable real estate can be purchased far below fair market value.  So when considering investments and how to diversify your portfolio let us help you better understand the advantages of being a private lender.