Last week Jeff Brown, real estate investment advisor, explained quite a bit about the hows and whys of real estate invement. He described the process, the myths that get the way of most people enjoying a work-free retirement, and a positive way to respond to a bad market situation. I’m left with only one question.

All right Jeff. You’ve got my attention. But at the end of the day, I really have only one question. How do you make sure I don’t lose all of my money?

The short answer is there’s no way I know of to make sure you don’t lose money. Losing all your money is something I’ve only heard about, and I’ve been doing this for close to four decades now. Be clear about this – nobody can ensure you don’t lose money when investing. It’s simply not possible. And if someone tells you they can – run.

It’s called risk capital for a reason.

That said, we do everything possible to see how far away from the cliff’s edge we can get. The idea after all is to go from point A to point B. Since retirement is most likely your point B, skirting the cliff is probably not appealing to you anyway. So what do we do to make investing as safe as possible?

First, we refuse to work with an investor who won’t have a reserve account. (Remember Sominex?) There are very few exceptions to this rule. The most recent was a man who has consistently earned over $30K a month for the last eight years. A bill for $900 isn’t going to ruin his day.

This reserve account is abundant in nature. Typically for a client who spends $100K to acquire 3-4 properties, a reserve account should be at least $30K — at least. We find ways for the client to make this happen.

The lion’s share of your capital’s security is established through the solid research done by either you or your advisor. How reliable is your conclusion that the area you like is really poised for long-term growth? Is the professional property management firm you found really as good as Uncle Farley said? Do you have reliable and experienced inspectors lined up? And how experienced is your lender? Many lenders will say they know investments, but most couldn’t find a solid investment loan with two helpers and a GPS. Do they even know what the right loan is for you and this particular property?

How about he subtle nuances of making the rental units appealing to prospective tenants – without breaking the bank to do so? Are you a softie? When tenants stop paying, and trust me, no matter how fine the filter, you will have bad tenants — what will you do? Let them stay for three more rentless months, or evict them and cut your losses?

This question goes to the root of the #1 axiom of investing: First protect the capital – THEN protect the return on the capital.

Solid research, having the right pros in place, and ensuring an abundant Sominex account before you even begin, will go a very long way to helping you avoid the loss of your capital. Being consistently involved, or at least in the loop, will be a key.

Finally, I’ll quote one of my favorite people, Warren Buffet. He was responding to a question referring to the strategy of diversification. In short, that strategy has the investor’s capital in opposing investments. For instance, if stocks go one way, bonds usually go the other. So the principle of diversification puts some money in both. Here’s what Mr. Buffet had to say about that:

“Diversification is for people who don’t know what they’re doing.”

Know exactly what you’re doing and why. It’s your capital’s best protection. If you don’t know, and don’t have time to learn it all, then find an experienced advisor.

“Know what you’re doing.” I feel like I know a WHOLE lot more now.

Thank you, Mr. Brown. You’ve made us all more prepared.

Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.

Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.

–ME “Liz” Strauss

Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.

Related
Interview 15.3: Jeff Walks Us Through the Process
Interview 15.2: Jeff Talks about the Two Myths that Get in Our Way
Interview 15.1: Jeff Brown, Real Estate Investment Advisor

Jeff, My Market Is Stinky

Yesterday Jeff Brown, real estate investment advisor, showed us how the process works. Now he has to answer the question that I have.

Jeff, my town’s real estate market is terrible. Should I wait until it’s better?

I’ve been hearing that question for some time now from many parts of the country. Let’s step back and look at the big picture. You have more options than you may believe.

I’m based in San Diego where the real estate market is worse than some and better than others. But nobody would say it’s currently a good market. I have many investors from here who have invested not only out of town, but out of state. Some have acquired properties in two states. Why?

Since your capital doesn’t know where it’s invested, you can go anywhere you like. There’s literally no strong argument for staying local just to be local. There’s nothing magical in being able to drive by your property. It might give you the warm and fuzzies, but if your area is terrible, your choices are limited.

You can either invest somewhere else, or not invest while you wait for your town’s market to recover.

In San Diego, that’s never going to happen. Don’t get me wrong — our market will regain its equilibrium. But in the next 5-10 years what investor in their right minds is going to pay $750,000 for a 40 year old duplex in a nice, but blue collar area of town? Not my clients, that’s for sure.

So exactly what are your options?

First understand there are growth regions out there. Don’t believe everything you read, see, or hear in the media. Bad news sells newspapers, and air time.

You can readily access areas offering very well located affordable investment properties, just waiting for your capital. People just like you have come to my office from San Diego, and after hearing about the Phoenix area, ended up investing in 2-6 properties there. The same thing is now happening in pockets all over the country. Austin, Ogden, Salt Lake City, Boise, Denver, and I could go on.

Should you let your local depressed market delay your investment agenda? No way.

So what should you do? (You mean besides call a very knowledgeable real estate investment advisor Jeff?) J

Before you even think about making any offers anywhere you need to have your property management in hand. This sounds easy, but trust me, most of them aren’t worth the time it takes to pull out of their parking lot. If you’re investing in another region, property management will be your best friend – or your worst nightmare. Make your choice wisely.

And finally, what’s the best part of investing in a far off city? You can’t drive by. You don’t get those 2 A.M. phone calls complaining about the stove’s pilot light. You’re not cleaning a newly vacated rental in preparation for a new tenant. Instead, you go to the movies or enjoy reading about how much your investments are appreciating in value. Investing out of town needn’t be difficult, but it does require you to be purposeful at every turn.

Should you wait until your town bounces back? You should if you can afford to tread the financial waters without hindering your retirement. Most people don’t have the luxury of wasting several years while their investment capital stagnates.

Make the move.

Jeff, you’ve made a difference in how I think about this subject.

Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.

Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.

–ME “Liz” Strauss

Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.

Related
Interview 15.3: Jeff Walks Us Through the Process
Interview 15.2: Jeff Talks about the Two Myths that Get in Our Way
Interview 15.1: Jeff Brown, Real Estate Investment Advisor

Jeff, Now What Do We Do?

Yesterday Jeff Brown, real estate investment advisor, explained the two myths that prevent most people from enjoying a work-free retirement. Once folks understand that they might actually be better off with a mortgage and investments. They get interested in the process. That’s where our conversation went next.

Jeff, how do you answer when someone says “Okay, I’m ready to invest. What is the process?”

Liz, Let’s assume we know exactly where you are now financially. Let’s further assume you have about $125K in cash to invest.

The first thing we do is decide how much should be allotted to cash reserves, or what I’ve already referred to as your Sominex account. In this case I’ll feel very comfortable if you retain around $40K. This will result in excellent sleep even though you had to buy that $700 refrigerator for unit #2. J

Before we get all excited and start making offers, we’ll head over to the lender to get you pre-qualified for the loans you’ll be getting. This will result in a letter from the lender saying you’re a solid citizen, and that yes, they’ll loan you the money for the property on which you’ve made an offer. This allows you to look very strong as a buyer from the seller’s viewpoint.

We’ve decided that since you need to grow your capital, Boise is a very good fit. You can find homes in great areas in the price range of $175-240K. The area is a job magnet, unemployment is below the nation’s average, and people are moving there in droves. In short, we like the region very much. Now all we have to do is start our search for appropriate properties.

While we’re doing that you have the option of flying to Boise or not. Most investors either never go to the far away city in which they invest, or wait until they’ve closed all their purchases. We recommend the latter. Since as professionals we already know the area well, plus have the valuable backup of the local pros, a trip to Boise before buying will only serve to make you feel better, not really accomplish much. We’ll arrange for our team to give you a very comprehensive tour of the region, take you to lunch for a one on one question & answer session, then take you wherever you need to go. We’ve even had clients land in the late morning and leave at night to go back home.

Whether you go there or not, you’ll be introduced to everybody on our team — agents, inspectors, and most importantly the property manager. You’ll know them by first name before the process is finished.

We’ve arrived at the good part now. We’ve found three homes priced to fit your budget. The offers are structured to your financing requirements, and plainly spell out who pays for what, when certain things must be done, (deadlines) says how much you’re putting down, and the rest of the details involved in buying real estate. One thing we insist on is a home warranty, which comes in very handy when a heater breaks down. Most of the time we’re able to get the seller to pay for the first year.

So now we’re in escrow on three Boise houses. We’ve done the numbers backwards and forwards, and it appears it will cost you a total of about $82.5K to close them. Since they’re set up to close in 30 days, we quickly order the appraisals and the professional property inspections. We have our managers also attend the inspections with an eye towards potential tenant objections. The inspector might not care about the neon orange shag carpeting, but the manager doesn’t want to try to explain to a potential tenant why orange shag is in these days. J

When we get the inspection report back we go over it with a fine tooth comb, then list the repairs we want the seller to make at their expense, before escrow closes. The seller then agrees. But we don’t just accept that. Before the closing date we send the same inspector to the properties to ensure all the repairs were made, and made professionally. (This second inspection is also attended by our manager.)

The only thing left is loan approval, loan document signing, and closing. Sounds simple doesn’t it? Actually those three things should be very simple. In real life Murphy sometimes finds a way to entertain himself at your expense. Let’s say your escrows are smooth as silk, as most are. The loan approval comes in, which triggers the drawing of the loan docs. Once drawn, they’re usually sent to the title company/escrow who then packs it off to wherever you are going to physically sign them. (For instance, in San Diego my mom would take them to your house so you wouldn’t be inconvenienced.) J

The signed loan docs are then shipped back to escrow. Escrow then crafts a HUD-1 statement, better known as a closing statement. This will detail where every last penny went for both the buyer and the seller. Some things like rent, interest, and HOA fees will be prorated between the buyer and seller as of the closing date.

The next day your escrow closes. The escrow sends the deed to the title company for recording at the county recorder’s office. You now own three well-located Boise homes. You’ll receive an envelop from the escrow company by mail containing all the documents for your records. Since their estimated closing amount is usually over-stated, you may also receive a check for unused funds.

All you have to do now is find a nice family who wants to rent your new places, and help make your retirement what you’ve always wanted it to be.

Thanks Jeff. You make it sound seamless.

Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.

Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.

–ME “Liz” Strauss

Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.

Related
Interview 15.2: Jeff Talks about the Two Myths that Get in Our Way
Interview 15.1: Jeff Brown, Real Estate Investment Advisor

Jeff, What Do You Do?

Yesterday Jeff Brown, real estate investment advisor, explained what he does to help people build wealth toward their retirement. One key he made was that it’s the job of a professional real estate investment advisor to ask and answer teh questions that we wouldn’t think or know to bring up about real estate investing in general or a particular transaction.

It’s also a professional advisor’s job to show us when we’re working with faulty information or hidden assumptions that are incorrect or out of date. That’s the basis for my next question.

Jeff, I’ve heard you talk about the “two myths” that prevent too many people from enjoying a work-free retirement. What are they and what’s the thinking around them?

Liz, I’ll just jump right in and start explaining what they are.

Myth #1 – I must retire with a huge savings account and a paid-off mortage on my home.

This myth is what I’ve come to call Grandpa Economics. Back in his day, few people owned their own home. The goal was to keep your nose to the grindstone, make all of your payments, and retire with a company pension and a free and clear home. That strategy worked for quite some time. The cost of living didn’t really move up much, and Grandpa’s plan served Grandpa pretty well.

Then came inflation, pensions began to disappear, and ‘qualified plans’ such as IRA’s and 401(k)’s put the burden of retirement solely on the worker’s shoulders. It was literally the end of an era. It was also the death knell for Grandpa Economics. Here’s why.

Imagine you’re approaching retirement and have managed to put almost 10 times what the average worker does in your retirement plan. That would be give or take $500K. At 8% interest, you’d receive $40K a year in income, plus the $15K or so from Social Security. That’s $55K in annual retirement income. Don’t smile so quickly.

You see, that’s before taxes. After tax that’s no more than $40K. And by the way, Uncle Sam is likely to tell you in your 70’s to begin paying back some of your principal. This will obviously shrink your $500K, which will then shrink your $40K a year. Not a happy thought.

By the way, since you paid off your home’s mortgage, you now own a 40-60 year old home demanding more maintenance than ever. We haven’t talked about health insurance premiums, replacing that 12 year old car, or just trying to live a life that includes visits to far off family.

Living that way probably isn’t the retirement that you, or Grandpa, dreamed of. Once that die is cast you’re stuck.

One way to climb out of that future is to invest in real estate. That gets your capital growth going. The earlier you do it, the more your investment can gain steam. By the time you’re ready to call it a day, it’s not uncommon to have built up an equity in seven figures. Seriously. You just have to be purposeful in your behavior, and patient with the market.

Myth #2 – I don’t have any money to invest.

I hear this myth the most — usually from folks living in a nice home in a great neighborhood. They almost always have $50-300K in untapped equity in their home. But they don’t have any cash. A business would never let money sit in equity like that, and we shouldn’t either. I help clients in just that position, take money out with a new loan so they can put it to work for them.

Often their new mortgage payments are only a little more than before, and sometimes they’ve actually been less! Really.

They take a big pile of the new loan and lay that money aside as a cash reserve account. I call that a Sominex account. The name speaks for itself — Sominex makes sleeping pills. We set up a Purposeful Plan to use the remaining money from the loan to invest in real estate they can comfortably afford. When we execute the first transaction, they officially become investors.

So you see, Liz, the two myths and Grandpa Economics come down to this.

Would you rather retire with $12,000 a month income and a $2,500 house payment? – OR $3,000 a month income with a free and clear home?

The answer to that question is the path you’ll be on for the rest of your life.

Thanks Jeff. I’m glad I asked.

Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.

Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.

–ME “Liz” Strauss

Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.

Related
Interview 15.1: Jeff Brown, Real Estate Investment Advisor

Jeff, What Do You Do?

I met Jeff Brown last year on the telephone. After an hour or so of questions, we decided to work together. Somewhere within that hour, I asked the “What do you do?” question. Jeff had a wonderful answer. “I make people wealthy, and help them reach their retirement dreams.” Jeff didn’t need any lessons in conversation from this writer-business girl.

I liked Jeff right away. He is integrity, intelligence, and intuitive detail about his business. Last week, this week, before taxes seemed an appropriate time to interview Jeff about his business. You’ll note that neither Jeff nor I suggest that you invest your millions without developing a plan that you fully understand.

Let’s begin.

Jeff, why should someone have a real estate investment advisor? How can a RE advisor help plan my retirement?

Essentially when you begin anything as crucially important as investing for your retirement, you want to ensure you have the answers you need when you need them. The greatest value a real estate investment advisor brings to the table is answering questions you didn’t know to ask. There’s very little planning you can execute when you don’t even know the questions.

Your advisor should understand how to create a Purposeful Plan for your retirement. He or she should be able to integrate financing, proper cash reserves, where to invest the capital, (what region) along with what kind of real estate makes the most sense. And those are just the basics.

The ability to simultaneously understand the appropriate tax law, including 1031 tax deferred exchange, various depreciation approaches – including cost segregation. Maybe the most important skill is being able to get the timing right when making moves with all or parts of your real estate portfolio.

This next piece of advice may surprise you – especially coming from a real estate guy. The very essence of retirement, at least financially, is nothing if not lots and lots of monthly income – and it better be reliable. Towards the onset of retirement I have many of my clients convert some of their equity into investments outside of real estate. Why? Because these specific investments, offered by another segment of the investment community, produce the pure gold retirees long for – annual TAX FREE income — for life.

In the end, your real estate investment advisor should be able to be the Captain of your retirement ship, navigating you to the retirement you’ve always dreamed of. He should be able to plot a course, and weather troubling seas. He should be able to adjust on the run, and in real time, because Murphy is alive and well.

It might help to know what a real estate investment advisor isn’t. He isn’t a real estate agent who sells houses one day, and the next he’s an investment expert. I’ll make an absolute statement of fact here, unfettered by any wiggle room – there is no such animal. The necessary training to be an effective advisor is almost daunting it’s so comprehensive. Tax law, after tax cash flow analysis, demographic trends, proper structuring of transactions, and a myriad of other factors.

And even though I have that training, plus almost 40 years of experience, I still have specialists in several fields just a phone call away. Retirement is too important to be ‘pretty sure’. Doing things on purpose has to be the bedrock principle of everything you do when investing for your retirement. There are very few happy accidents.

Okay, so now I get the part of what Jeff does, well sort of. . . . He guides real estate investments so that I can retire with cash to live as well or better than I did when I was working.

In Part 2, we’re going to talk about the two myths that get in the way of most folks being able to retire with out having to supplement their cash income.

Thanks Jeff. This is important stuff.

–ME “Liz” Strauss

Jeff writes at his own blog BawldGuy Talking and is a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.