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Introduction 1 - Master Potential 2 - Master Goals 3 - Master Time 4 - Master Money & Work 5 - Master Small Business 6 - Master Real Estate 7 - Master Health 8 - Master Mind 9 - Master Relationships 10 - Master Life Conclusion |
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Lesson Six - Master Real EstateOperational Guidelines
Understanding the real estate market is a must for anyone seeking financial independence. Residential real estate transactions in the United States represent a $1 trillion business or 15% of the country's total gross national product. The Internet, as a real estate investing tool, is becoming increasingly useful.
Price, Price, Price
What are the most important rules for buying real estate? The standard answer is location, location and location. This is the wrong answer. The correct answer is price, price and price. Digest the information in this lesson and you will begin to see how the world of real estate actually works. You will see that the real estate business works just like any other business. To make a profit, you must buy low and sell high. The conventional wisdom espoused by many "experts" in the real estate profession, the real estate agents, is that you can't buy at discount. Again, this is the typical refuge of the naysayers giving excuses to those looking for justification for inaction. Because these real estate "pros" haven't done it, you can't do it. These experts want you to believe that making money in real estate is somehow different from making money in other kinds of businesses. It isn't. The majority of people own one house. They are average people. They are not financial geniuses. Buying a home or a multi-family or a condo is not brain surgery or rocket science. What others do once, you can do twice or six times or a hundred and six times. You can buy and sell and repeat and repeat. With the right research, you can make a profit on each transaction. The system couldn't be more logical or uncomplicated. The ease of the Master Real Estate system makes you wonder why more people aren't real estate investors. Real estate prices are cyclical. Prices go up and then prices go down but not as much as they went up. Over time, prices rise. Recently, prices went way up and then way down. There was a reason for this exaggerated fluctuation. Do-good politicians encouraged eager lenders to loosen credit and allow the under qualified to buy homes and to refinance continually. This party is now over. Reason and equity have returned. When most average people run away from real estate, sophisticated investors, who take the time to research, can cherry pick bargains and build future fortunes.
Realistic GoalTo become wealthy, you do not have to invent a product, become CEO of a major corporation, hit the lottery or marry an heiress. As a Master of Success, you can buy six properties and love your tenants. What sixty percent of ordinary people do once, buy a house, you will do six or more times. You will buy and sell to keep improving your portfolio. When you own six well located and well maintained properties, you can change your strategy to debt reduction. If you have twenty year mortgages, that will be in twenty years. If you keep buying and selling, you can reduce this time considerably. When you own your six properties, free of debt, you are well positioned to retire early. You certainly will be able to live more comfortably.Buy six properties and love your tenants. This will be a good life. This will be your life. And, future generations will thank you. Your six properties could be your own home and traditional income producing real estate: two-family, four-family, twelve-unit apartment buildings. You may have twenty or more tenants. If you are guided by the Golden Rule, managing tenants is not an arduous undertaking. Conceivably, you could own six properties without any non-family tenants by owning your own home, a summer home, a condo for your daughter, another for your parents, and a retail location and warehouse for your businesses. How do you buy six properties? You buy one property at a time. You make improvements, raise rents, cut expenses and pay down debt until you have a positive cash flow. Then, you buy another property.
The Real Estate Master's MindsetYou buy a mansion in a fantastic location for two million dollars. If the mansion is worth a two million dollars, you make no money. It's worth two million and you pay two million. So, instead of buying the mansion you buy a rundown four-family house in a bad location. This property is actually worth $320,000 but you buy it for $240,000. How do you know that the property is worth $320,000? You know values because you have made the effort to research prices. Why did you get such a deal? There could be many possible reasons. One of these reasons will simply be that you made an offer and that offer was accepted. You made an offer to an owner who wanted to sell and no one else made an acceptable offer before you did.How much does it cost you to make an offer in real estate? It costs nothing. That is zero. This is very straightforward. Make a lot of offers. If you told your friends about buying the mansion, they would ooh and ahh in admiration and offer their congratulations. If you told them about buying the dilapidated four-family, they might be very happy to recite every horror story and problem that they ever had with real estate. You will hear about the leaking pipes, the tenants from hell, the junk cars, and the vacancies. Of course, all of these bad things could be among the good reasons why you were able to buy the property for $240,000. For the $80,000 profit, you'd have to be willing to correct problems and call a plumber, a lawyer, a tow truck or a rental agent. In the final analysis, you may never find out the seller's motivation in accepting your offer. The reasons could be business or personal. You offered $180,000 and then $220,000 and then your $240,000 offer was accepted. Does the reason the seller decided to accept your offer really matter? Remember the mantra of the master salesperson, "Some will, some won't, so what, next."
Buy. Sell. Profit.What if you don't want to own the four-family? You sell it. You take your profit and you buy something that you do want to own. Don't allow the details to obscure the larger picture. Is there a guarantee that you can sell the house that you buy for $240,000 for $320,000? Of course not; be patient and leave a wide margin for error. With time and research, you will put your deals together. The $320,000 price is your best estimate after you buy it, clean it up and resell. There are no absolute guarantees and that is the main reason that most people don't have the courage to take a risk. They would prefer a guarantee. You can find investments that are guaranteed but the investment returns are minimal. The Master Success System is giving you the courage to do more, to build confidence. You research. You make lots of offers. You buy. You sell. You profit.Is the point to buy junk property? No, the point is to buy real estate for less than what it is worth. You buy real estate for less than what it's worth by researching and becoming an expert at value and by making offers. The examples of the run down property and the mansion are illustrative of the concept. The location doesn't matter. The type of property doesn't matter. The price does matter. The right acquisition price allows you the leeway to buy, hold and resell at a net profit after expenses.
Real Estate and PencilsLet's compare real estate to the pencil business. You are in the pencil business and your standard pencil sells for an average price of $0.10. Some fancy stores sell the pencil for $0.12 and some discounters sell it for $0.08. You are the pencil manufacturer. To make a profit of $0.02 per pencil, you must get a wholesale price of $0.06 per pencil.Who cares if one guy makes one cent on a pencil and another guy makes three cents on a pencil and someone makes two cents on a pencil? Who cares about pencils? The point of the pencil analogy is to help you to gain insight into the real estate investment business. You can do the same thing with real estate that the pencil guy does with his pencils. The difference is that his pencil may cost $0.10 and your real estate may cost $200,000. He makes a couple of pennies and you make thousands. If someone can make 10%- 20% margins buying and selling pencils, you can make 10% -20% margins buying and selling real estate. The business principles of buying at wholesale prices and selling at retail prices are the same. Actually this isn't totally correct because investing and making money in residential real estate can be a lot easier than being in the pencil business. In the pencil business, all of the parties involved: the manufacturer, the wholesaler and the retailer are certainly very knowledgeable about pencil values. In contrast, in residential real estate, you may be dealing with a seller who has little personal knowledge of value who is being advised by an agent who may not know much more. In many residential transactions, your specialized knowledge of value will give you a clear advantage when you negotiate. If you were buying stocks, would you ever invest through a stockbroker who never bought stocks for himself? You would not. Then, why would you choose to work with a real estate agent who never bought investment real estate? In fact, very few real estate agents own investment real estate. It may be difficult for you to find a residential investment agent in your community. The obvious reason is that the agents who buy investment real estate make enough money that they don't have to be real estate agents any more. Being a real estate broker can be a tough job.
The Residential Real Estate Marketing ProcessIn their lifetime, most residential sellers will be involved in less than a half dozen transactions. With the purchase and sale of a home usually involving hundreds of thousands of dollars, you would think that any rational homeowner would seek the best available expert assistance to protect their most valuable asset. The person is called a real estate agent.The next step in our system is to understand the role of real estate agents: what they do and how they do it. How do homeowners select a real estate agent? Did they see a yard sign? Is it the agent that they used seven years ago? Is it their niece? Did they see a warm and fuzzy TV commercial? Did they simply walk into the office nearest their home? After twenty years or more of study, all brain surgeons are probably pretty good. If you meet someone who is a board certified brain surgeon, she is probably a pretty good physician. If you meet someone who is a board certified real estate agent, there is no guarantee he or she is any good. In many places, becoming a real estate agent is not exactly the result of rigorous study. You don't need Mensa credentials. If you are a high school graduate, haven't been convicted of a recent felony, take a few classes and pass a simple test, you will be welcome in the real estate profession. Again, there are smart agents. The smartest real estate agents are those who quickly figure out that the best reason to be in the real estate brokerage business is to scoop up the best bargains for themselves before the general public can get to them. The smart real estate agent quickly becomes the smart real estate investor. There are also superstar real estate agents who make six figure incomes. These super agents account for about twenty percent of the total. With a little research, you can find and cultivate these super agents. They will understand your system. They will not be offended by your fondness for making offers because they will be smart enough to see beyond a single transaction. You are a client who will generate multiple commissions. Average real estate agents, many of whom are dabbling part-timers, are the guiding forces behind most residential real estate transactions in America.
The High Cost of Free
In a typical transaction, the residential sales process begins with a homeowner requesting a "Free Market Analysis." It is hard to imagine that a homeowner who is about to enter into a financial transaction involving hundreds of thousands of dollars would opt to let the appraisal rest on a "Free Market Analysis." Incomprehensibly, it seems that most homeowners rationalize that it would be foolish to spend a few hundred dollars on an independent professional appraisal when the local real estate agent is willing to do the job for nothing. To market property, any owner relying on anyone except a superstar agent is making a big mistake; however, it is a common mistake that only creates a steady stream of profitable opportunities for you. The real estate agent answering a listing call is always highly motivated. She is highly motivated to get the listing. The homeowner who calls a real estate agent is not speaking to an independent consultant who will offer objective advice. Instead, the homeowner is speaking with a commissioned salesperson who desperately needs listings to survive. Here is a typical house-listing scenario. The agent tours the house while complimenting the homeowners on their decorating expertise. The agent wants to befriend the homeowners. She wants to gain their confidence and approval. At this time, the agent will also help the homeowners alleviate any fears they may have about the pending sale. If the homeowners are concerned about the economy or leaking cesspool or the cracked foundation or lead paint, the agent offers comfort. Don't worry. Don't worry. The agent thinks to herself that she will deal with any concerns after she has gotten the listing. The agent is laser focused on getting the listing. Without the listing, there is nothing. After the house tour, the agent and homeowners sit down to begin a cat and mouse quiz. The aim of the agent is to pry a value figure from the homeowner. How much does the homeowner think the house is worth? Regardless of economic conditions and comparable sales data, the agent doesn't dare risk insulting the homeowner with a low number. The agent wants the homeowner pleased no matter how inflated the price. "Free Market Analysis" evaluations always start high. If the house doesn't sell quickly, the agent rationalizes that there will be plenty of time to knock the price down at a later date. The agent tells the owner what the owner wants to hear in order to get the listing. The agent needs to get the listing before leaving the house. The agent doesn't want the homeowner to seek a second opinion and run the risk that the second opinion will come in even higher than her inflated figure. The average real estate agent gives the homeowner a value for the house, which ensures that the homeowner gives that agent the listing. Period. You can hire professional, independent appraisers who will research sales and give you a detailed analysis of value. This takes some time and costs hundreds of dollars. Realistically, how much work can a real estate agent offering a "Free Market Analysis" afford to do? Maybe she spends a few minutes looking for other similar houses on the market or comparable recent sales. Maybe. The object of the real estate agent is to get the listing and get the house on the market and allow the market, through the eventual buyer, to set the true value. The incentive of the residential agent is not to establish value. Absurdity aside, the incentive is to get the listing.
You are going to make money in the real estate business because you will be more knowledgeable than the other parties to the transaction. You are going to make money because your expectations are reasonable. Let's say that you buy a very ordinary condo that your research tells you is worth $200,000. Every time one of these units comes on the market, you offer $160,000. Sometimes these offers will be rejected outright. Sometimes there will be counter offers. Perhaps, after one of your offers, the real estate agent tells you that the seller has been transferred out of state and is interested in a speedy transaction. This presents a win-win situation for both you and the seller. If you negotiate a deal at $170,000, you just made $30,000. This is just like the $30,000 you may have worked months to earn at another job. You earned a paper profit of $30,000 without any risk or real upfront money. It happened in the flash of a real estate deal. There are transaction costs and holding costs involved in buying real estate and a real estate commission and taxes to pay when you sell. These expenses will impact your net profit. These will be part of your cost of doing business. FSBOsThe word is getting out that many real estate agents are not worth a five percent commission. Homeowners selling a four hundred thousand dollar house are increasingly reluctant to give a real estate agent twenty thousand dollars to hold an open house, put the house in the Multiple Listing Service [MLS] and run a few ads. They choose to sell their home themselves as FSBOs [For Sale By Owner]. Or, they choose to hire discount brokers who for a few thousand dollars will put their homes in MLS, give them a sign, a few forms and a good-luck pat on the back.Statistically, FSBO sellers usually fail and end up hiring an agent. Look for FSBO marketers. Many are know-it-alls who may not, indeed, know it all. Deal Only In A Specific AreaDuring your acquisition years, when you are buying and selling, building your six property portfolio, you must deal in a small specific investment area. With specific knowledge of historical and comparative real estate market data in a small area, you gain an essential negotiating edge.Your small specific investment area should contain approximately 25,000 people. If you live in a city, your investment area may be one neighborhood. If you live in a rural area, it can be an entire county. Your area may have 5,000 to 10,000 properties. This is sufficient inventory to complete your six property investment mission. Most real estate agents will serve an area far larger than your small specific investment area. In consulting and negotiating, their broader knowledge will not match your specific knowledge. What they know is not important. What you know is. Your objective is to become an expert in value in your small, specific investment area. You should begin to feel confident about your research in two months and you'll probably be one of the few area experts on prices in six months. In a year, odds are that you will be "the" expert. Knowledge will be your power to make money.
What are the value-added features of the property? How much does a garage, a basement, a second bathroom, or a backyard deck add to a house's value? Is off-street parking or walking to public transportation important? Is proximity to shopping, a highway or a park desirable to prospective buyers? If so, put a dollar value on the amenity. In some areas, each of these variables can be significant. In other areas, they may not significantly affect value. You must know these variables, and be able to put a price on them. An extra 1,000 square feet in lot size in the middle of a rural area may not be significant while 1,000 square feet in the middle of city may be worth millions. In major population centers, even the air over a building, called air rights, can be worth millions. You may find in your area that a garage is worth an extra $20,000, a half bath $10,000, or having a Main Street address $50,000. What about the zoning? What about the lot size? What about the assessment? What about a finished basement? Are there properties with scenic views? What are the variables and what are they worth? This is the research that you are doing. The more you can isolate and identify specific factors affecting property values in your specific area, the more money you'll make. This system is not just about making low offers on property. It is not simply about seeing a house listed for $300,000 and offering $260,000, although you may make such offers. As you start to work this system, you will begin to find houses listed for less than what they are worth. For example, you may find a $150,000 house listed for $130,000. You could buy the house for the full listed price and still be getting a great deal. Most real estate sales or title transfer information is publicly available. The Internet has made the gathering and organization of raw data easier. With minimal efforts, you should be able to find data on property sales including: the names of the buyers and sellers, the sale price, the amount of the mortgage, the name of the lender giving the loan, the lot size, the size of the house, etc. If you like the formats, make databases and charts galore. Researching property data is your job. Do your job. Don't be lulled into complacency. To become an expert on real estate values, you've got to get out of your chair and into your car. There is a lot of potential profit at stake. This is not the time to take shortcuts. You can't see beautiful room colors, shoddy construction, a great tiled bathroom, wet basement problems or attic expansion possibilities from a listing sheet or a newspaper ad. Your goal will be to inspect each and every property that comes on the market in your area. Yes, some properties will be out of your price range but you still want to see many of them. Even if your target buys are in the $200,000 to $400,000 price ranges, you still will want to see and understand why some properties sell for $600,000, $800,000 or more. Inspecting properties will become your part-time job. Generally, making an appointment and seeing a property will take less than 30 minutes. In another half hour, you can make an offer and be on your way to a handsome profit. Become the historian of housing values in your small, specific investment area. For each property in your investment area, you will want to record the original asking price and the final sale price. What was your initial reaction to the original asking price? You are now the appraiser. Do you feel that the asking price and sale prices were high, low or average? In your opinion, did the new buyer pay too much? Was it a good deal or an average deal? Most properties sell in 120 days. How long did this property stay on the market? Were you able to glean any special information, such as the size of the down payment or the name of the lender?
When most residential buyers make offers on property, they are thinking about more than money. They are going to live in the house. They have to like the kitchen and the neighborhood and the schools and local government. Your personal housing preferences are not particularly relevant. You aren't going to live in the house. When you make offers, you only have to like the price. When most homeowners are selling property, they are thinking about more than money. They are leaving many memories behind. This house represents their emotional past. They must simultaneously think about leaving and moving to a new kitchen and new neighborhood and new schools. For many people, the home selling process can be quite unpleasant. Many sellers wish to sell as quickly as possible. The seller must keep the house perfect at all times, because agents may call at any hour of any day. The entire sales process can be traumatic with strangers of all types milling about the house and a few making rude comments. Consider that you may make an offer of $360,000 for a property that the seller had bought years ago for $160,000. The sellers may be only too happy to take this substantial appreciation and run laughing to the bank and then to the beach.
There are many reasons why people sell houses. Maybe there has been a death in the family and the survivors want to leave the house because of memories. Maybe there is a new baby and a larger house is needed. Maybe there is a lost job or a new job. Perhaps the owners don't want to do any more maintenance. The owner could have had a fight with the neighbors. Sellers can have many motives which are not your concern. Your single concern will be price and terms. If you don't get what you want, you move on to the next deal. For you, there will always be a next deal. It is not necessary for you to love a home to profit from it. This is now your business. What happens if the sellers don't like your offer? They can reject it. The sellers are holding the cards and you are not. When it becomes your turn to be the seller, you can decide to accept or reject offers. Holding and Managing Investment Real EstateThe object of buying and selling property, commonly called flipping, is to make enough money so that you can invest in solid income properties. You will want to make a sufficient down payment so that the rental income will at least cover your expenses with some surplus. This surplus is called your cash flow. Your cash flow may be small during your early years of ownership and should increase each year, especially if you opt for a fixed-rate mortgage.Many people shy away from the real estate investment business because of a fear of dealing with tenants. However, most successful real estate investors love their tenants. When you buy a property, you will be borrowing many tens of thousands of dollars. You borrow money but you don't really use your own money to pay the loan back. You have these wonderful people called tenants who, every month, give you their money to pay back your loans. Over time, they collect receipts and you get rich. Love your tenants. You borrow money and someone else pays that money back for you. For example, you might buy a $480,000 six-family apartment building. Your down payment may be $80,000 and you arrange a $400,000 mortgage for 20 years. Each month, your tenants give you the money to repay your loan. In 20 years, the loan is repaid and you have the $400,000. This is called amortization. In 20 years, the $480,000 property may be worth $800,000. This is called appreciation. Your $80,000 becomes $800,000. This is not somebody getting lucky and hitting the lottery. This is a typical real estate investment transaction. In every community there are a few people, rich people, who have figured this out and own the investment real estate. Join them! Don't be afraid of tenants. Your investment is their home and the vast majority of people treat their homes with the utmost respect. Love your tenants for what they can do for you. They can help make your financial goals a reality. Managing small investment properties is not particularly difficult or time consuming. If you maintain your properties properly, the time commitment will be in the one- to two-hour range per property per week. When you have a problem, you react as if you had that problem at home; you call a plumber, electrician or carpenter for help. If you are not skilled yourself, you will be able to find a local general contractor willing to do small jobs. One of the big advantages of investing in real estate is that you don't have to own much to be wealthy. If you own six small investment properties in your community, you are probably well on your way to an early, comfortable retirement. Even one good rental property in addition to your own house can make a significant difference in your future. Mistakes to avoidThis system does not work for everyone for a number of reasons:
The Home Reinvestment MethodA modified approach to this real estate system is called the home reinvestment method. You search for a good home value. You buy and move into the home. You decorate and improve. You add a hefty profit onto your costs while keeping the property continually on the market. You remain in the house until you sell. You take your profit and find another house. Buying and selling your own house minimizes the holding and security costs of purchasing a vacant house. Holding costs during buying and selling can also be minimized by having a tenant in the property who knows that the property is being marketed. To secure the tenant's cooperation in the marketing process, you may offer them a bonus when the property sells. There are many investors who use this method and double their annual income.This chapter is only a mere hint of an idea to motivate you toward self education in the field of real estate investing. In real estate, as in any other business, you want to be informed and stay informed. Keep looking at houses. Keep talking to brokers and other investors. Keep talking to your tenants. Keep reading real estate books. Keep up on prices by reading your Sunday newspaper and local real estate magazines. Keep surfing the Internet.
Go HardcoreAs a Master of Success, you have a focused goal to buy six properties and love your tenants. In twenty years or less, you can be in a strong financial position. You will see your life options multiply.Realize that you can control large investments with small percentage down payments. The object of buying and selling property, flipping, is to make enough money so that you can invest in solid income properties. You will want the rental income at least to cover your expenses with some surplus. The most important factor to consider in real estate investing is not location. It is price. Just like any other investment you must buy low and sell high. It is better to buy a $120,000 starter condo for $80,000 than it is to buy two million dollar waterfront estate for two million dollars. In real estate, knowledge is power. Through research it is possible to gain a competitive edge in the marketplace. Real estate is a local business. To become an expert in real estate values, limit your real estate activities to an area containing approximately 25,000 people. Research the asking and sales prices in your small, specific investment area. Make lots of offers. Stick to that area. Find and work with a top real estate agent. Go for six or more properties but even if you end up with only your own home and one additional piece of investment property, you will be miles ahead of most people. |
