PAY DAY

We have finally received our first paycheck from our apartment building. $4906.22.

I made color copies of it and plan on keeping it in a special place, sort of like what you see restaurants do with $1 bills put in frames behind the register. Officially it is not the first money that we received from the apartments (we were credited for a prorated portion of the rents at closing), but it is the first official check that we have received from rent.It will not always been for this same amount. The property manager has been doing a lot of work for us, at an hourly rate, in order to get the property in the running condition that we want it to be. They roofing and the siding are still being replaced, but the security gates are fully installed and awaiting fire department inspection. Once these things are fully completed, the property manager will not have as much to do outside of collecting the rent, and any minor repairs that may arise.

As I mentioned in my last post, not all of the tenets are caught up on their rent. But this payment covers two months worth of rents, minus two $800 management fees from the get go. Other fees that were deducted were for permits for repairs, and lawn services that the property manager paid for, new lease fees, and the service fees for each time they had to meet with the various vendors. Basically the property manager pays for the cheaper items out of pocket first and them gets reimbursed from the rent payments. They way she does not have to contact us for every little item that is needed and then wait for us to send the money. It makes less work for both of us.

So, what do we plan to do with this money? Not much at this point. It is going into the bank to re-build up our cash reserves for the next investment opportunity. We are just adding it back into our cash reserves. We are not big spenders nor are we prone to splurging. We are already looking for other properties, and the more cash we can set aside, the more properties we will buy. When the money starts to pile up faster than I can invest it is when I will finally feel comfortable.

Renters

When it comes to our first real estate investment, we are relying solely on rental income as the only source of income. There are no coin-op washersand dryers on site or anything else that could bring in extra income. In away we feel that we are at the mercy of our tenets. We have not raised the rent on them We are considering a moderate increase once the repairs are all done. We realize that our tenets are below the national poverty line, and we do not want to put any extra pressure on them to pay us more money.The problem is that they do not pay their rent on time. It is not just one or two tenants that have this problem, but most of them have this problem. I think that it is not a problem of discipline, but a problem of the lack of money. So, we have been trying to think of a solution. We have discussed payment plans with our property manager, but she did not sound too hopeful.

I have made no secrets of my plans to be a philanthropist, and I genuinely want to help people like our tenants who are at the bottom of the financial barrel, so I have been trying to think outside the box for a solution. I have thought about starting a business where employees could work for me from home, so that I cannot only have these people as tenants, but as employees. The major problem I have with this is that my tenants do not have access to computers, and most if the jobs like this require internetaccess. I plan on doing more research for opportunities for people in these situations to see what sort of solutions area already out there. I had an idea, before we even closed on this property, to give everyone of our tenants, regardless of their payment history, a break at Christmas time. I was thinking of either a discount for the month of Dec, or a freemonth of rent depending on how well we were doing for the year. At this rate I do not know if we can pull it off for this year, but I still want to do something for these people. So, we are considering sending them gift cars to the nearest grocery store.

Rich Dad LIVE

This past Tuesday, my husband and I went to see Robert and Kim Kiyosaki speak live at a small college in NYC. It was an event sponsored by public television WLIW. We learned about the event when we caught one of his shows with fund raising breaks interspersed throughout. We made a donation and received two tickets to the event. If we had donated more we also could have gotten a set of some DVDs and books. We just went for the tickets. For anyone that has even tried to get into the city thru the Lincoln Tunnel between 5:30 and 6:00 will understand why we were late to the show. We missed about the first half hour. But once we sat down it seemed like he was discussing items that we had seem him give similar speeches about on tv. There was one item that we caught that he has promised to talk about during this seminar. He was going to reveal the next big thing in investing, or at least the next big thing in his opinion. I am sharing that revelation here with you now. SILVER. Silver is supposed to be the next hot item to invest in. Of course if everyone who listens to Kiyosaki invests in silver stocks, the price will go up. I know that he already owns some silver, and may even have ownership in silver mines, so it will be good for him too.

Discussing the future of silver was just the briefest portion of the seminar. He mostly spoke about what the tools are needed to be a successful real estate investor. He discussed what he refers to as the Financial IQ:

1- Make $
2- Protect
3- Budget
4- Leverage
5- Intelligence

He referred back to these 5 points several times throughout the evening to help solidify the points he was trying to make. He also stressed three important things that every investor needs.

1- Good Partners
2- Good Finances
3- Good Management

In fact he had a gentlemen with him who was his business partner and owned a management company. Unfortunately I do not recall his name. But he was a valuable part of the evening because he was able to discuss in some details how he has worked the numbers on some past real estate deals with Kiyosaki. He believed that an important part of investing in not just the property management, but the management of the finances of the purchase and sale of the properties. I would love to hear more from him. He actually had a product that he was selling that night, but we were not in the mood to spend any more money that night, so we did not even look.

To go back to some of the points above. He suggested starting businesses as the best way to make money to invest in. Of course it sounds a lot easier than it is for most people. But I think that it is excellent advise that I plan on pursuing. Unfortunately I missed most of what he said about protect, which I would love to see if he covers this topic during his TV programs. It sounds self-explanatory, but I think there may be some secondary definition or twist that he adds that I am upset that I missed. Budget and Leverage were two important points as well, that I did hear fully explained, and were pretty much what you would expect. Keeping a budget is important for any thing that you do. I also think that preparation of the budget is also important, especially when presenting the deal to investors. Kiyosaki is also a supporter of the art of leveraging one property to buy another. He is a believer in good debt. A lot of the examples that they discussed were deals where the property was reassessed and refinanced after purchase in order to pull out the initial cash investment in the property. He called this infinite leverage.

They glossed over the points of creative financing and using investors, which as points that we wanted to hear more about. So, at the end of the evening, after we got our books signed, we asked the other gentleman (He was more accessible that Robert or Kim.) and asked if he could share some of the gems of creative financing. Of course there is no easy answer to that question. He mostly said that networking is the key. Just getting yourself out there and letting people know what you do. So, I asked if it was the person or the deal that really sold investors. He believed that it was the deal first and then the people. This was my assumption too, since most people only care about the bottom line. But it was still good to hear it from someone with a lot more experience.

Starting New with the Investment

We had secretly hoped that we would be able to make money right out of the gate with our first investment. We weren’t really expecting to, but we were hoping to. We knew from very early on that the building needed to have a new roof and new siding put on, but a few other surprises have popped up, along with their price tags.

Our first priority was to have the roof and siding done to prevent further damage to the building. This property had a history of deferred maintenance, so we wanted to try to get some of the big problems out of the way to try to protect against further damages. Our property manager set it up for us, and we spoke to the contractor ourselves before starting.

What we weren't expecting was a notice from the local police. We knew that the building was in a bad neighborhood, but we did not know that the police were cracking down in the area and putting pressure on property owners who ignore the problems with their properties. Fortunately it is not in my nature to do unethical and immoral things involving other human beings. I saw this as another opportunity, not only to improve my investment, but to improve the whole area for everyone involved. So, we spoke to the police officer about how to improve the property. So, we are going to be putting in security gates at all the access points to the central courtyard. We are hopeful that this will solve some of the crime problems and give our tenets some security. Of course we are also putting in policies to screen potential tenets, and will evict any tenets that cause continual problems. So far it is working well.

Our property manager asked us today if some of the tenets could contact us directly. Of course, one of the main purposes of having a property manager is so that tenets do not call us with every little problem, but we have given them our mailing address. Now we just have to wait and see, but the manager made it sound positive.

Closing

The trial and tribulations of closing on this investment seemed never ending. In fact we were due a small refund at the time of closing which we still have not received after a month and a half. (I am told that it is in the mail.)

The entire closing process was a very daunting task indeed. I only made it worse by how worried we were about the whole thing falling thru now that we had finally reached the end. The paperwork was never ending. I am sure that we duplicated information many millions of times. We had to supply all sorts of forms to the lender, not just the basic application forms with the details about the property, but notarized forms to prove that we were who we said we were, and even a form to say that there was never a dry cleaning business on the property. At points I thought that the paperwork would drive me insane. Every time I thought that it was all over and I had sent in everything that I needed to, they would request more. Maybe it was due to the lender, maybe the type of loan, or maybe the type of property, I just do not know.

My plan is to put together a list and copies of all of the documents needed for closing, or at least the ones that we needed for this closing. So then in the future we can have the items available in advance to make the process smoother. I have just not had the stomach to go over it all again. But when I do I will post it as a reference for everyone else. I hope that it will be a useful tool for anyone who is on the selling end also since the seller supplied a large number of the items.

We closed on our first apartment building.

There were times when I wasn’t sure that we were ever going to make it to the closing table. Even the last few days were a little hairy at times. But we did, as a matter of fact, close the transaction. We are now officially Real Estate Investors!!!!!!!

There are a lot of steps to the whole transaction that I have not yet written about, but I plan to go over the whole thing in future entries. For now I am looking ahead to what we are going to do next. First we need to do is make sure that all of the terms are clear between the management company and us. They were employed by the seller, and we have decided to keep them on, and we want the transition to be smooth. Then we are going to go over the estimates that we have already received for replacing the roof and the siding, and arrange to actually have the work done this summer. I have no idea how long the work will actually take to get done, or how soon anyone can start the work, but we are hoping that the actual cost remains within 20% of the estimates. We were fortunate that the appraised value came in higher than the amount that we paid. So, we have $25,000 instant equity, plus the amount of cash that we put down. Once the work on the roof and siding is done, (and maybe a few other minor repairs) we are going to try to get secondary financing on the property and pull some of our money out for the next investment. I have no idea how much of a difference the work that we are doing will make on the appraised value of the property. The hope is that the value will increase more than the amount that the repairs cost.

Until then, I am waiting for the feeling of being a new real estate investor set in. It still does not quite feel real yet. Maybe it will feel more real when we lose on our second investment.

The Millionaire Inside

On CNBC, there is a show called “The Millionaire Inside”. I caught part of the show the other day, and found it rather fascinating. They had four guest experts on to advise people on how to make money the same ways that they have, David Bach, Phil Town, Loral Langemeier, and Barbara Corcoran. I cannot give you all of the details about their personal backgrounds. More of that information can be find on the website for the show, http://www.cnbc.com/id/17912006, and I am sure that Google searches will also pull up even more info. I am going to do that myself to see if I can learn more about them. I always like to know what sort of background people have in order to put their advice and experiences in proper perspective.

There are some very important points that they made that I think are worth repeating and thinking about. I jotted down a few points during the show.

Invest early, and don’t fear your first investment.
This sounds pretty basic, but most people don’t follow these rules, including me. I wish that I started investing with my very first paycheck, or at least in my 20s. Instead, I am starting in my mid-30s with the better late than never philosophy. If you think about it, I might not be wealthy until my 40s or 50s since I began later in life. But I am going to be 50 one day either way. I would rather be wealthy at that age, then in the same boat that I am in now. So I don’t let these thoughts stop my actions.As far as fear is involved, it is difficult to keep ones emotions in check. Fear is a natural response to any new experience. I just have to keep in mind that investing is a risk and fear is just a natural part of it. The trick is to not let it rule your actions. I take a deep breath and look at the each situation objectively and just give it a try.

Pay Yourself First
This point really struck out in my mind. Just yesterday I read just the opposite information in a book about buying businesses. The point that the book was trying to make was that a lot of small business owners end up paying themselves last, after all of the other business needs have been finished. What the experts on the millionaire inside were trying to point out was that this is the incorrect mindset to have. If you are going to be in business to make money you need to make sure that you get paid, and paid first. If this does not work, then the business needs to be re-evaluated.

Buy, don’t lease
Home equity is your single greatest asset
Building equity is a point that I keep seeing come up over and over again. It is better to own your own home than to rent. That is a basic idea of building wealth.This was a point that the show emphasized, but not just for personal residences. They stressed that if you are going to own your own business, it is also important to own the property that houses that business. Not only is it another excellent source of income from other possible tenets, it is one extra safe-guard for the business.

REIT can be an easier way to invest in real estate
I have not personally looked into investing in REITs (Real Estate Investment Trusts), but I am going to look into them and report back.

Still Trying to Buy the First Property

We still have not gotten to the closing on our first property. The initial problem was our naiveté in thinking that the transaction would move along quickly and smoothly. We were very wrong. We should have chosen date at least 6 months out. We just simply did not know how long some of these things would really take to get done. It is also difficult to do things quickly because we both have full time jobs, which leaves only evenings and weekends to get things done. We are forced to rely heavily on email because we are not available to call people during regular business hours.

There always seems to be a need for more paperwork. I had a huge mortgage packet of items that were needed for the mortgage. I sent it all in, and then phoned the lender a few days later to see if there was anything else that was needed. I was told no, that the mortgage package was complete. Since then, they have come back to me twice needing at least 8 different items, all of which they need before they can complete whatever they need to close. So, it takes me a couple of days to put it together and mail it to them. Another delay. I am going to make a master list of all of the items that I have had to present to them, and prepare it in advance for the next property that I try to buy. This way I will have it ready before they even ask. It sounds like an ideal plan, but most of the items come from the seller, so you I will need to make sure that they also have their paperwork in order for me.

But I don’t let all of this stuff get me down. It is all part of the learning process. I just keep thinking ahead and moving forward with my plans and goals.

Personal Updates

It has been too long since I last posted anything about my real estate dealings.Basically, we still have not closed on our first transaction. Everything seems to take about 10 times longer to complete that I estimate in my head.

On a more personal note, I have found new employment. I always complained about the commute and how it took too much time each day just to get to work. It just so happened that a new job within five minutes of my house fell into my lap. I consider myself very lucky to have gotten this job. I sent out only one resume in my job search, and got just the job that I wanted. It was a lateral move as far as salary goes, but a big step up in lifestyle.I get to come home everyday for lunch and water my garden. It is wonderful.

My husband has been making great strides in starting his business. He is getting ready to start his first marketing campaign for new clients. I am very excited for him. He has so many great ideas about the industry and about the future of the corporate climate. It makes me very happy to see him having the opportunity to do this.

Subject To

The term Subject To is used to describe a certain method of buying real estate. Basically during the purchase the deed is transferred from the seller to the buyer, but the mortgage remains in the sellers name. You have ownership rights, but those rights are "subject to" the existing mortgages.

This sort of deal requires a very motivated seller who does not have a lot of equity in their property. There are any number of reasons that sellers might find themselves in this financial situation. It would be a good option for people who are facing foreclosure if they do not sell, as long as they are not already behind on their mortgage payments. You, as the buyer, structure the deal so that they sign the deed over to you, and you take over their mortgage payments.

There is much legality involved that I am just learning all of the details about, but there are also a lot of benefits. First of all, there are no mortgage qualifications, and no down payment or mortgage fees are required. It is easier to refinance the property once you own it than it is when you are first purchasing it.

This topic will require a lot more research before I would attempt it. I always thought that mortgages were structured to come due at the time of the sale of the property. There must be some legal instance where this sort of subject-to deal is allowed. It also seems like the sort of deal that can mostly be found on single-family houses, and not commercial properties. But it cannot hurt to ask for this kind of selling structure for any deal.

Closing-The Continual Delays

When we first put a bid on this 15-unit apartment building in Dallas, we thought it would be easy. We set a closing date for only 2 months away. Now we have learned our lesson. Our most recent closing day was supposed to be last Friday, the 9th, but now it has been moved out another three weeks to the 30th. I have been going crazy for the last two weeks trying to make sure that everything was getting done on both sides. So I am thankful to have more time and more sanity.

There is no single party at fault that has been causing these delays. There is simply just a lot of work to do and in the end it is benefiting us because if we did close early we would have been missing out on a lot of information that could have cost us in the future.

Just this week I learned that an out of state LLC needs permission to operate in Texas. I have been led to believe that this is not true for all states, but I imagine that it is. There is a simple form to fill out and a $750 fee to send in and that takes care of it. But we would have been in a lot of trouble if we closed without it. Especially if we were later sued by a tenant and then found out that because we were not properly set up as an LLC in Texas and we no longer have the protection of the LLC. The moral of this story is to make sure that you have a good lawyer.

Buying with No Money Down

I have seen a lot about a method of purchasing properties with No Money Down. Some people seem to have enough success with it that they sell their systems to others. Other people do not seem to have much luck with it at all. I recently found a link to a man who purchased 8 properties in one year using this method and he is now facing foreclosure and the fact that he may have committed mortgage fraud.


I have read through most of one book on the subject. “Nothing Down for the 2000s” by Robert Allen. The reason that I stopped reading the book is because every example of a no-money-down transaction that he gave seemed fishy. I read this book before I knew most of what I know today about investing. Since then I have also read a review of this man by John T. Reed that highlights illegal activities that the author has been convicted of.


If you look at the basics of the no-money-down deal, and take out of the equation the fact that mortgage companies may not like those deals, or whatever other legal or ethical issues there may be, and look purely at the profit and loss numbers the deals do not make much sense. The entire purchase price is a loan of some form or another. Therefore the entire purchase price of the investment needs to be paid back with interest. I have evaluated hundreds if not thousands of properties. I analyze them with the assumption that I am only putting down 20% of the purchase price. Even with this assumption most of the properties do not have a significant cash flow if any cash flow at all. So, if you put down $0 and have to make additional payments on that extra loan, the cash flow becomes even worse. It just makes no sense to me.


I believe leveraging debt is an important tactic for beginning investors to use to build up their portfolio, but eventually it is good to start to pay off that debt to maximize cash flow. There is a man who I have encountered on some forums that claims to purchase properties with all cash and no mortgage debts. Of course it takes a while to get to the position where you can afford to do this, and I am sure that there are limits to how much he can buy. But it is something that I will fantasize about being able to do myself one day.


As I write this I am thinking of a way to formulate not only the maximum cash flow, but also maximum return on investment for each property based on the amount of mortgage owed. It seems to be that there had to be an optimal level that will give you the most ROI and cash flow depending in the property.
Something to work on……

Mentoring

Popular opinion states that in order succeed as a real estate investor one of the things that you need is a mentor. Therefore a lot of the real estate gurus offer mentoring programs as part of their sales packages. I do not have a mentor, I am not actively seeking a mentor, and I think I will do just fine without one. However, if you look at it from a different perspective, I have several mentors all at once.

There is no single person that I look to for advice and guidance. There is no one person that I can phone with questions that has done what I am trying to do before me. But the resources that I have found and that I use regularly have taken the place of this single mentor for me. There are two discussion forums that I visit quite regularly, richdad.com and biggerpockets.com. If I have any questions, I look for the answers there. If I cannot find what I am looking for, I ask. Of course I also freely offer my opinions to anyone who cares to read them.

I suggest that everyone check out these forums, as well any others that you can find. I wish that I had more time to spend on them. It is the best source of advice that I have found so far. I consider everyone on those forums to be my mentor. Be sure to check out people’s profiles so that you have a sense of what they do and where they are coming from.

LLC Accounts

There is more involved in opening and LLC than just filing with the state. This week we went one step further and opened a business checking account in the name of the LLC. Even though the financial info for the LLC will be filed with our personal tax returns, this will make it that much simpler to keep track of our expenses and profits. The hope is that it will also legitimize business expenses in the eyes of the IRS. Or that is at least what our account advised us to do. We are also going to need to set up a savings account for any overflow if money (I like to think positively.) and any security deposits.


There is something that I read about once that I have just done some research on again. It is called Accredited Investor Status by the SEC. Some of the requirements for this status involve corporations that trade securities. But for individuals, you either have to have a net worth of $1,000,000 or an income over the past two years of $200,000 ($300,000 for spouses) with the expectation to continue at that level. There are a lot of investment companies out there (a lot of hedge funds) that want you to be accredited before you can invest in them. Some of these companies invest in real estate domestically and globally.


Why and I interested in this? I am looking in to the distant future, beyond just getting out of the rat race. Although anyone can start out investing in real estate there are still opportunities out there that are only available to seasoned investors. I am going to keep this accredited status in mind and file for it once I can qualify and then see what sort of other investment opportunities present themselves.

Commercial Mortgages

I am new to the world of commercial mortgages, but I have found it to be very confusing. I have talked with several brokers and direct lenders, and the all seem to have different standards and requirements. I have been given rates, for the same property, that were as high as 13.5% and as low as 6.75%. Some of them were willing to finance 90% LTV others would not budge from 80% LTV. All of them required some sort of basic documentation. Some of them weighted the property numbers more than our personal finances, while others were more concerned with our personal finances than the property.

I learned the basics about mortgages from the purchase of my home in 2005. Basically the bank will only lend you a percentage of the value of the home. This percentage is called the LTV-Loan to Value. The value used by the lender is the lesser of the purchase price or the appraisal value. For people buying a property as their personal residence, there are various programs that allow people to buy homes with a very high LTV and very little money down. It is much different for investment properties. Once the lender knows that you are not planning on living in the property that you are purchasing the rules change. People are not as vested in properties that they are not living in and therefore the risk of them not paying the mortgage increases.

Applying for any loan requires lots of paperwork. I knew that I had all of the paperwork that they required, but putting it all together proved to be more work than I had planned on. I have now learned to reorganize my files in order to have everything that the lender requires in one area, instead of a dozen places. I am planning to put together my own financial statement that I can update regularly with my personal information. The format and information contain will be a combination of some of the standard forms that lenders sent to me. I will give more details in a future blog once I have it all set up.

It also makes a big difference if the seller is organized and has all of the financials on their properties organized. One of the items that most lenders wanted to see was the profit and expense lists for the past year or two of the property as well as rent rolls. I am trying to keep this in mind as I set up all of the files and paperwork that I will need to manage this property. That way I will have less work to do when we decide it is time to sell this investment.

The Cash Flow Game

We attended another Real Estate Investors Association meeting this week. There was no speaker or topic. Instead we broke up into groups to play the Cash Flow Game. The Cash Flow Game is an invention of Robert Kiyosaki of Rich Dad, Poor Dad Fame. It is a board game that can be played by about 6 players at a time. Each player is assigned a profession and the basic financial parameters of that profession. There is a center circular track on the board that is called that Rat Race. That is where all of the players being, going round and round in the rat race. The object is to get your passive income to be higher than your expenses. Then you can get out of the Rat Race and on to the Fast Track. On the Fast Track, the income potential increases dramatically, and basically you have won the game.


The game makes several interesting points. The first being that your starting profession, doctor or janitor, has no bearing on how quickly you can get out of the rat race. The other important point is that as long as you keep playing, all players will eventually get out of the Rat Race. The game also requires that you keep a basic personal financial balance sheet. So, it is helpful to see how different kinds of investments affect your personal financials.


Even though the game is a bit pricey, $195, to purchase, I would recommend it as a useful tool to begin your real estate investing career. There is also a children’s version of this game that I am told is also very good. I have yet to try it myself since I do not have any children, but I do believe that it is important to teach children financial lessons early in life.

Personal Development and Real Estate Investing

You do not need to look very far to see that there is a connection between personal development and real estate investing. I have not done any research to discover where and how this may have begun, but I still find it very interesting. The information that is out there is telling people how to expand themselves personally and financially.

For some reason Real Estate investing is not a mainstream idea. When people talk about investing, they are referring to their 401K or IRA accounts. Some people even own mutual funds or tech stocks. They read Barron’s and hope to find the next break-out stock that will make them rich. Most people are just plain afraid to invest. We all fear losing money. We all fear losing all of our stuff.

Real Estate investing or any other type of investing is not taught in school. In school you learn a trade so that you can go out into the real world and get a job that will pay you enough to cover all of your bills. I am beginning to believe that investing needs to be taught in schools. The world is a rapidly changing place and we need to start to look at money in new ways.

This is where all of the gurus come in. People get to a point where they are not happy with their life, for whatever reason. Some people will reach out to try to find an answer to solve their problems. The gurus are there waiting telling people that if they want a better life, it is theirs for the taking. What is the number one thing that people think they need to make them happy? More money will make people happy. More money is the answer to your problems. Real Estate is an excellent way to make money and be your own boss. It all is very logical.

Money is referred to as the root of all evil, but it is also marketed as the savior.

Dallas Contract Revisions

I just wanted to add in a quick update on the progress of the property in Dallas that we are under contract for. When we had the inspection done, it turned up more than we expected. The seller had already told us that the exterior siding and stucco needed to be replaced and that he would be giving us a credit for it at closing. It turns out that the roof also needed to be replaced. There were a number of other minor things that could be fixed also. So, we wrote up an amendment to the contract asking for these minor repairs and for the credit at closing to also include replacing the roof. I had a nervous couple of days. and then the seller agreed to everything that we had asked for. I expected a little bit more of a debate, but I am pleased with the way things turned out. The seller is now getting more estimates for repairs, so we do not yet know how much the credit will be for.

I have also been busy trying to find a good mortgage. At first I went to a broker, but I have not been please with the lack of information and the amount of points and fees. There have to be better deals out there and I am trying to find them. Loans are expensive enough already without all of the additional fees that are added on. What is the purpose of points anyway?

This week I will also be securing insurance for the property. The company that we currently use for our home and automobiles also covers Texas. Someone recently recommended an umbrella policy as a extra method of protection from litigation, so I will be inquiring about the detaisl for that.

Lots of work, so little time.

Forming an LLC

We have recently formed a Limited Liability Company (LLC) in which to hold our real estate assets. We named it Hewitt REI, LLC. The REI stands for Real Estate Investments, but that is too long, so we went with the popular abbreviation.

Most people agree that the LLC is the best way to hold real estate to offer protection from litigation. For small businesses it is more beneficial that an S or C Corp because it avoid double taxation. For an LLC, any income that the properties produce is considered as personal income and is taxed as such. For full corporations, the corporation is first taxed for any income, and then the money that is taken out of the corporation is then taxed again as personal income.

I also need to state that just because we have an LLC to hold our properties in does not mean that we are completely free from lawsuits. If someone gets hurt on our property, or decides to try to sue us for any other rental related reason, they will be suing the LLC and not us as individuals. That means that if they win, they cannot claim my personal residence of other assets as payment in the suit. However, if they can prove that we somehow personally did something, or were somehow grossly negligent, then they can try to sue us personally. The success and outcome of that attempt would be determined by the details of the case and how good your lawyer is. I just want to point out that having an LLC is added personal protection from litigation, but in no way is that protection 100%.

Filing for the LLC was rather simple. We filed in New Jersey, and did it all on-line. It took us about 20 minutes. I insist on reading all of the fine print, so most people are probably able to complete the process in less time. It cost only $250.00. Then the state sent us these nice looking forms complete with a gold seal. They certify that we can do business under our chosen name, and that our company is in good standing. We also filed separately for a federal tax id number. There was no charge for that. So, now we are all set to transfer the property to the LLC at or shortly after the closing. It is something that our lawyer will handle, but I am told that it is a simple form for the transfer.

Real Estate Business Systems

Real Estate Investing takes a lot of work, but it is the best source of passive income.

That sentence does not make any sense, does it? How can something be passive and take a lot of work to do? The answer is that it starts out as a lot of work, but with the proper systems in place it becomes passive (at least for the person who sets up the system).

I do not yet have our business system set up, and the details of its final form have yet to be worked out, (and will change a dozen times before reaching the end), but I know what my goals for it are. It needs to be able to run with very little input from me or my husband. The hard work comes in setting up those systems.

Once the property has been bought and all of the needed repairs and management put into place, I want very little to do with each property every day. I am not saying that I expect never to do anything for it ever again. The management company will send reports about the property, and I will need to make decisions in the future about any repairs that need to be made. But this should not take more than a few hours a month, if even that.

I do not want to have employees or even an office outside of my home that I need to go to everyday. I want to have client relationships with people and businesses. They will do whatever portion of the real estate process that they specialize in and just charge a fee. I do not ever want to deal with payroll or health insurance that is not my families.

I am not a lazy person. I was raised with good work ethics, but I want my time to be free for other investments. If I am too busy managing the details of properties than how am I supposed to have to time purchase and run hundreds more.

There is another side to this picture also. I hear so many people say that they bought real estate with “private investor money”. Those private investors are making passive income. They have money to invest and it is being invested in real estate. Other people are finding the deals for them and using their money to buy it. I am sure that some of those deals are not only set up based on a quick ROI%, but based on long-term equity in the property.

I am constantly amazed at how many ways there are to make money in real estate.

Why Invest in Real Estate

Why do we invest in real estate? Why does anyone? More importantly, why doesn’t everyone?

First of all, statistically it would just not work out if everyone invested in real estate, but there is certainly still plenty of room for newcomers in the world of investing. Every time I mention to someone, friend or stranger, that I am starting to invest in real estate, people have their doubts about me, but never about the fact that real estate is a good investment. Mostly people see it as something out of my league. As something that is reserved for people that are already wealthy.

I believe that fear motivated people not to try new things. I know that when I do not want to do something, I can come up with a dozen excuses within less than one minute. That is the same thing that people are doing to me when I discuss real estate investing. The fear they feel about trying to make these investments them selves comes out as doubt over my success. I am not trying to say that no one supports my decisions, but they all doubt that it will work for me in the long run.

In 5, 10 or 15 years I might just be wealthy from my investments it real estate. I also might not be. However those 5, 10 and 15 years are still going to pass me by. I would rather spend them trying to change my life, then not trying at all.

I am not slated to retire from the general work force for another 30 years. 30 years is an awfully long time. And in 30 years they may have risen the retirement age another 5 to 10 years. I am not a patient person, waiting 5 to 10 years to retire is going to be difficult for me. I would hate to see what I miserable person I would be in 30 years of jobs that I only marginally like.

So, why aren’t you investing?

Motivation to Invest

In this crazy and busy world it is sometimes difficult to stay focused on our mail goals in life. It is very easy to get sidetracked by family and anything else that happens in life. Some real estate and self-help gurus recommend writing down your goals, and the steps that you can take to get there. Then you can go back and read these goals and methods to help you stay focused. I think this is a wonderful idea. I had helped a great may people. I was about to add that I have not yet done this myself, but that is not true. This blog is helping me to write out my goals and keep me motivated.

I recently spoke with a friend of my husband who is a personal fitness trainer. He was discussing with us the methods that he uses to keep people motivated and give them a more positive attitude towards those things that they really might not want to do, like go to the gym, or not eat that tasty dessert. A lot of what he had to say I could relate to my situation. You need to focus on the positive aspects of the future and not what may have gone wrong in the past, or even what may be unpleasant or tedious to do in the present. It is all about the greater good of the future. In my case, my future as a full time real estate investor.

My goal is simply to become a full time real estate investor. I still have to take care of certain family and personal obligations, but when the mood strikes, or I just run out of time, I need to reevaluate myself and restructure my time to make sure that I can still reach my goals. I never thought about myself as someone who was goal oriented, but it turns out that I always have been. I just have not always been the type to write my goals down in a nice list.

Real Estate Investors Association Meeting

This week we attended our first Real Estate Investors Association Meeting. There were about 30-40 people in attendance and the topic for the night was “Flipping not Flopping”. We are not actually interested in flipping properties at this point in our lives; we were more interested in meeting other investors and networking.

We did meet some very interesting people. Most of them were shocked not only to hear that our first investment is to be out of state, but that we have no intentions of ever going to Texas to see the property. A few of them acted like they had never even heard of people investing in this manner before. Based on what I have read, I thought it was quite common. Maybe the idea has not hit the east coast yet.

There was one man who sparked our interest. He presented himself as a hard-money lender. We discussed the difficulty with finding the small hard-money lenders, and he hinted that he might be able to help us. When I have done searched for hard money in the past I have only found large companies that only lend money in the millions. One day I will be working with hard-money lenders like these, but that day is not today.

The man who taught the seminar had some interesting methods and point of views about investing. He has only been in real estate for 2 years, but has made enough money to now hire people to help him with his system. Some of these young and eager men were also there. Not only did they work for this man, but he was also helping them with their own deals. Sort of like an apprenticeship.

Although it was interesting to hear what other people are doing with flipping, I could not help but wonder about the legal and ethical issues around it. I understand that it is a last report for some people who are in default on their mortgage and that they will lose the house anyway. But I think that I would feel too much like a vulture. There is an increasing problem with foreclosures across the country. There has to be a better way to help these people. But then again, there is not way to stop people from making bad decisions, financial or otherwise.

The legality of it all is also a question in my mind. There seemed to be several legal fine lines that this man played with on a regular basis. I am positive that there are several instances where questionable legal strategies were used. In a way I think what they are doing is an excellent way to make money. I have no problem with using legal loopholes, and I hope my career takes advantage of some. You need to have a certain personality and temperament to make flipping really successful, and I am not one of those people. (But you never know, there could be a million different ways to flip properties.)

To Become Wealthy: Contract Details Part VII

Closing: I would expect this to be the final part of the contract, but it is only on page 7 out of 13. Lawyers do not make anything that is short and simple. That way you are guaranteed to need them for anything involving any contracts. Please do not misinterpret my statements as anti-lawyer. I am glad to use them and welcome their expertise and assistance. I am really anti-contracts. Anyway, our closing date was initially set for Feb 2nd, but we have extended it out three weeks simply because both sides need more time to prepare everything, especially since the Xmas and New Years holidays were thrown in the mix.

There is a long list of what both the Seller and the Buyer need to have at closing. Some of these things are restated from earlier in the contact so I will not go thru them again.

When we closed on our personal residence last year, the closing almost seemed like a formality. All of the work had already been done and reviewed before the closing. We basically sat at a large table in front of a big stack of papers and signed our names until our fingers cramped up. Then we had to sing some more. The lawyer gave the seller’s lawyer a check and we got the keys to the house. Except for the finger cramping, it was a painless procedure. I expect that this time the only difference will be that we will receive a FedEx package containing a large stack of papers that will require our signatures that we will then have to mail back before the closing date. We will probably never have the keys to this place, but the property manager will.

To Become Wealthy: Inspection Report

The property was inspected the other day by a professional. Of course we were not able to attend, but our realtor went along to see the details for herself. The report was very thorough and detailed. The inspector even included a lot of digital photos of anything that was below standard and needed work. Overall ,we were pleased with the job that was done.

Sometime the levels that people will sink to in cleanliness amazes me. There were photos of one apartment that I could barely force myself to look at. These people had let their dogs have the run of the place, and from the looks of it, they never took their pets out for a walk, or bothered to clean up after them. It was disgusting to even try to imagine what it mush have smelled like. I believe those tenets are in the middle of getting evicted. I am going to look into the cost of having that apartment professionally cleaned. I fear that smells like that never really come out. Although this turns my stomach, this alone does not deter us from purchasing the apartment complex.

We already knew that the exterior needs to be completely redone, and a credit to do it is included as part of the contract. The only other major thing that will make or break this apartment complex for us is the roof. It looks like it needs to be completely redone. In the photos we could see that it was a sunny, cloudless day, but there were puddles of water on the roof. There was also evidence of water damage in several apartments that I am sure correspond to the puddles. So, we want to also add the total amount to redo the roof to be included in the contract.

Basically, there has been a history of deferred maintenance in this complex that is apparent in the inspection report. We have no plans for rehabbing the entire property, but we would like to put a stop to its decline. I believe that although this is an investment for us, we need to take into consideration that people are living in our investment and that they are ultimately the ones who are responsible for our monthly cash flow, so we need to give them some consideration. This property is not located in the best neighborhood, but that does not mean that we cannot do some simple things to try to keep them happy with where they have chosen to live. I want to be wealthy, but I do not think that in order to maximize my profits that I need to sacrifice my tenants.

To Become Wealthy: Contract Details Part VI

I am going to become wealthy. I have a plan and I am going to show the world how I make money as I make money. My main objective is to make passive income thru the acquisition of real estate all over the country. All of my failures and all of my triumphs are going to be out in the open for everyone to see.

Leases: This item is sort of obvious also. It simple states that all leases must be in full effect t while under contract and that the seller can not enter into new contracts without our consent. It is a little bit of protection from mean and vindictive types of sellers. The seller also must disclose any conditions that may lead a tenent to be able to terminate their lease, or any concessions, bonuses or free rents. Any advance payments also need to be disclosed.

Estoppel Certificates: I went over this briefly before, because we received several of these certificates from the seller. I have figured it out, and basically these certificates are from the tenents to certify the basics of the lease, amount owed, amount of security deposit, any offsets and the expiration date of the lease.

The next section of the contract names the different brokers involved in the sale, and the amounts that they wish to receive at the time of closing. Our realtor wants 3%. Ultimately it is up to the seller to negotiate this fee because they end up paying it out of the purchase price. I think our realtor deserves the 3%. She has been working very hard for us.

To Become Wealthy: Dallas Property Update

The inspection was done today for the 15-unit apartment building that we are current under contract to buy. Our realtor was there for the entire thing and seemed pleased. She did mention a few things that needed work to be done to them, but she saw that as a plus, as additional bargaining power. In any real estate transaction anything that we can get to come off of the price is good news to me.

We have also been receiving a lot of paperwork from the seller. I received a copy of one of the leases today, and some estoppel certificates. Before last week I had never heard of the word estoppel and I will admit that I am still not entire sure of what it means. The certificates appear to be some sort of agreement with the renters to continue with the same leases under the new buyer as they did with the seller.

I have also learned that they are in the process of evicting 3 tenants. I have mixed feelings about this. Of course I do not want tenants in the building that are not paying rent, and I am glad that the evictions are not costing me anything. But it does make me wonder what types of tenants the other people are, and what sort will be attracted to live in this area. I have also learned that one of the tenants is Section 8. That I am happy about.

To Become Wealthy: Contract Details Part V

HAPPY NEW YEAR!!!!!! I want to wish everyone out there a healthy and prosperous new year. Let this be the best year of investing for us all!


Property Information: Under this contract the seller has 10 days to provide us with a:

rent roll
copies of the leases, including any amendments
inventory of all personal property included in the sale
copies of notes and deeds of trust that will not be paid by closing
copies of any current maintenance contracts or managements agreements
copies of utility statements
copies of any warranties or guaranties
copies of any insurance policies related to the property
copies of any leases related to the property
copy of the “as-built” plans and specs and plat of the property (?????)
copies of invoices for repairs in the previous 24 months
copy of property income and expense statement for the state period
copies of all previous environments assessments
real and personal property tax statements for the past 2 years

This is a lot of information. I am going to need to double check to make sure that we received all of these items. There are several that I already have, and a few might not be relevant, but I really need to double check it all.

This also gives me an idea of the types of records that I will need to keep on the property so that I will have an east time being compliant when I chose to sell the property.