A Real (estate) Opportunity

In the 6 years I've been on this and the richdad forums, there were always a bunch of guys who said:

"The RE market is going up. I'm gonna wait until it hits bottom."

As most of you know, we didn't do this. Using Robert Kiyosaki's "buy for cashflow, not for appreciation" formula, we bought a bed and breakfast in the Napa Valley, and started using the $$$ we made from it (the cashflow) to fund our next RE investments.

We continue to do this.

From 2002 to 2008, we have made over $4,000,000-- by developing properties into something that was worth more than we paid for them. We didn't use appreciation as our growth tool-- we used "improvement" and "change of use". And we used the cashflow from our first investment (the B&B) to keep funding things.

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So if you were one of those people on the fence back in 2002, telling everyone you were gonna wait until the market went down, well,

NOW IS THE TIME.

Yes, it's possible that housing prices will continue to decline.

And, of course, the RE market is going to be different in different parts of the country-- and other parts of the world.

But if you're buying a place as an investment to rent out, this is a pretty incredible time.

I'll post an example or two in this thread, of SFH's (single family homes) in my area that have actually gotten to the point where they will start to cashflow with, say, 10-20% down. This has NEVER been the case for SFHs as long as I've been doing RE in California (again, in other parts of the country, the markets are different).

Some of the prices on foreclosed SFHs are just plain crazy right now. They don't reflect market value-- they reflect the panic/burning desire of the lender to get the bad debt off their books as soon as possible.

See, the lender (a bank) would rather take a short term loss (say, $100,000) on a house than keep it on the books for the next 3 years until the markets recover. Why? Because the sooner they clear out all of their bad debt, the better they look to outside investors. From the bank's point of view, it's better to have a quarter or two with billions of dollars in losses, and return to profitability within a year, than to have a lot of property that is "worth" more on paper, but does not give them cash.

And these same banks are not really making a lot of new loans right now. It's not surprising, in light of the losses they're taking. But some of the pricing I'm seeing is flat out crazy-- people not being able to get loans on a $200K house in a development where all of the other (identical) homes are $350K.

Someone is picking up some amazing deals right now-- the REOs and foreclosures at about 70¢ on the dollar.

So that's the point of this thread:

Real Estate gurus say that you make your money when you buy, not when you sell (in other words, if you buy LOW, you have already made your money).

When people asked "What kind of price reflects making money when you buy?", I've always answered, "If you can get RE for 30% under full market value, you're in the ballpark."


Gee, the 70% of FMV we've talking about all these years-- and right now, it's not 1 in a 200 houses at this price, it's the majority of what's actually selling!

If we could only get loans on the dang things . . .

-Russ H.

__________________
"Control everything. Own nothing." -John D. Rockefeller

"Don't confuse motion with action" -Ernest Hemingway

Russ,

Are you finding it hard to "sit on your hands" and watch this happen? I know I am. It is such an amazing opportunity. (focus, focus, focus I tell myself). Ever since I saw this going on in Denver about a year ago - I have been second guessing myself... (focus, focus, focus)

Are you tempted?

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Oh gawd, are we! We have $800K (cash) at our disposal right now-- and all of these deals are SO CHEAP!

But yes, you got me, my mantra continues to be . . .

FOCUS
FOCUS
FOCUS.

We have that $$ because we need it to finish the other B&B project. As soon as it is done (and cashflow positive), we can start looking.

But by then (15 mos from now), this stuff will be GONE!

Focus. Focus. Focus.

Have I mentioned that the house next to our first B&B is for sale? And that we could convert it to a 5 rm B&B in DAYS? And that we could make it an 8 room B&B in a matter of months-- WHILE IT WAS UP AND RUNNING AS A 5 RM B&B?

So even if we get the big project done and have some extra cash, we'd probably jump on this opportunity, as it's our area of . . . focus!

(that, and if we got it for $900K, we could turn it into an asset worth $3M with about $200K in additions-- so if you do the math, investing in the house next door and making almost $2M-- is still more profitable (greater ROI) than buying 10 houses and making $100K on each)

Focus. Focus. Focus. . .

-Russ H.

__________________
"Control everything. Own nothing." -John D. Rockefeller

"Don't confuse motion with action" -Ernest Hemingway

Here's an example:

3/2 House on nice lot in good neighborhood.

Sold for $435,000 on 05.01.06
Sold for $323,000 on 10.26.07 (prev owner had watched too many fix n flip shows, house torn apart*)

*Notice the 2 new cars parked in front on the google street view photo!

179 Creekside Cir, American Canyon, CA 94503 | sold for $323,000 on 10/26/2007

House is now for sale for $179,000 or best offer (Bank owned):

Dynamic features include a database property search with full color photographs of listings in Napa County.

Say you get it for $160K.

That's 64% LESS-- ALMOST 2/3 LESS-- than what it sold for 2 years ago!!

(. . . focus, focus, focus . . .)

-Russ H.

__________________
"Control everything. Own nothing." -John D. Rockefeller

"Don't confuse motion with action" -Ernest Hemingway

So Russ, suppose your were going to deviate from your plan to take advantage of these opportunities (I know you aren't going to, but maybe you'd play along with me for fun - and education??)

Would you look to purchase these properties cheap and rent out in the meantime while waiting for the market to come back? (Could be 5-10 yrs...who knows, right?)

Just curious what you'd do in a situation like this...

Thanks,
Sid23

__________________
Faith is taking the first step even when you don't see the whole staircase.
-Martin Luther King, Jr

Sid-

What we'd do if we were not in the B&B business and wanted to get into RE right now:


1. Have capital lined up (pref yours that you don't have to pay interest on)

This can be anything from money in the bank, to self directed IRAs, to other creative financing (e.g., loans from investors who don't need any interim payments, just a balloon cash out in 10 years).

2. Keep up w/the foreclosures and MLS listings of new properties.

3. Stick to ONE AREA/neighborhood (at least if you're just beginning)

There are so many foreclosures right now, this is easy to do. And you can easily become an expert in one neighborhood. Being an expert on a whole region is much, much harder.

4. Identify properties that will cashflow (i.e, rent for enough so they cover all your expenses, and have extra left over)

This is easier said than done. You need to have a spreadsheet with going rents, and know how much you can get for renting a house in a specific neighborhood. Then, add on the repairs and maintenance for a year, the other expenses (yardwork, etc), and prop taxes and insurance. The spreadsheet will tell you how much to pay for the house.

5. Got a number? Offer LESS.

If the list price *just* makes your numbers work, walk away (or offer less). In most cases, you'll have some surprise expenses/repairs, so you actually need to buy the house for LESS than your spreadsheet tells you.

6. Choose houses that are cosmetic fixers, NOT big rehabs.

Yes, I know I'm a rehab guy. But I've been a contractor since the late 1970s. If you don't have this skill set, best to buy something that needs paint, a roof, new carpet or hardwood, etc.

You want to buy something that can be fixed in, say 3 WEEKS, so when your first payments come due, you're already renting it out, or at least interviewing good prospective tenants.

7. Be sure to have more money in reserve than you think you need.

You need this for both repairs, and for carrying costs on the properties you buy. We try to keep at least 6 months worth of readily accessible funds around.

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This is how we'd start right now, if we weren't already waist deep into our PLAN.

Questions are welcome!

-Russ H.

__________________
"Control everything. Own nothing." -John D. Rockefeller

"Don't confuse motion with action" -Ernest Hemingway

I am a total newb when it comes to this area of investment.

Do you need to have 100% of the capital available? If not what % is desirable?


Where would I be able to find these types of listings for neighborhoods in my area? Would I need to use a real-estate agent to obtain the listings?

Would you consider the current environment too volatile for someone new to the game or the perfect storm for even new investors?

Do you have any other recommended resources for the green real estate investor?

Thank you.

Start with the book "The Millionaire Real Estate Investor" by Gary Keller. It's a great intro to RE investing, and will give a lot of insight.

From there, start thinking about what kind of investing you might like to do (if any). For example:

Houses

- Finding houses for investors (bird-dogging)
- Finding houses, putting them under contract and selling to investors (wholesaling)
- Buying houses to hold as rentals (landlording)
- Buying, rehabbing, and then reselling houses (flipping)

Apartments

- Buying and renting out apartment buildings (landlording)
- Buying mismanaged apartment buildings and reselling ("value plays")

Commercial

- Buying and leasing commercial buildings;
- Buying self storage space;

Development

- Buying land and building commercial or residential property;

There are probably a hundred other areas of real estate that you could potentially get involved in, but those are the most common among those I know.

Once you figure out a niche you'd like to get more involved in, let us know, and I'm sure we'll have plenty of ideas for additional resources...

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J Scott
http://www.reistartup.com

Right now, having 100% is going to make things MUCH easier-- you can offer the lender a fast close, with no loan contingencies. Only thing is, you've gotta REALLY do your due diligence when it comes to inspecting the potential houses. There are a few recent threads by JScott on this, with some excellent input from some long-time contractors.

a. Find a local realtor who specializes in foreclosures. This is important, as the contract process is different from a standard SFH purchase.

b. Perfect storm is a good analogy. If you go in prepared (again, JScott is a great example of this), you will probably do well. But if you don't have the right preparation, you will drown!

c. JScott's posts on this in the past few months have been excellent.

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I suppose I should add one REALLY important thing:

This needs to make sense with your PLAN.

Buying houses needs to be part of your roadmap to wealth-- there has to be a really, really good reason for doing it.

For us, buying 10 houses at 150-200K below market value that cashflow $200/mo would be a great way to generate $2000/mo cashflow, and to have real estate that we can sell (via 1031 exchanges) into bigger real estate.

So when I look at these houses and my brain goes "ka-CHING!", it's not as a long term rental. It's for short term investment to generate capital when I sell it a year or so from now.

Do this w/10 houses (invest 20% down on each) and you have the potential to really make some green when the markets recover in a few years.

And if you buy outright, your money will be generating income back to you, until you refi and pull the cash out for your next deal!

Hoping this makes sense. I've been doing it so long sometimes I don't explain things well.

-Russ H.

__________________
"Control everything. Own nothing." -John D. Rockefeller

"Don't confuse motion with action" -Ernest Hemingway

Its not really worth moving out of your area of expertise, unless its a hell of a deal. OTOH If you just grab a couple it might be a nice place to park some money and get a decent return. On the next upswing dump them, who cares how long you have to wait if the cash flow is positive.

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" to buy while blood is running in the streets."
Mayer Amschel Rothschild

Russ, first off, thanks for the amazing notes. This is really great. You are great at explaining ideas and make this simple for anyone to follow. I live less than an hour from Napa and my PLAN was looking for a "side opportunity" just like this so I sincerely appreciate all of your notes.

Major rep speed ++++++++++++++++++++++++++++++++++++++++++++

A couple of questions:

1) I agree that paying 100% CASH for these types of properties makes the process that much easier. I do not have that type of cash on hand, but my idea would be to raise it from investors. If I was only able to raise say, 20% or so from investors, I suppose I would be looking at bank financing, no?

2) If a bought a few homes as investments using this strategy, would I lose my status as a first time homebuyer? I have been told to be careful of this, especially living in the Bay Area and wanting to buy a home in the next few years. Not sure it matters, but thought I would throw that out there.

3) Any other creative ways to structure the acquisitions? Using hard money lenders would probably kill any cashflow?

4) When creating your business plan for this idea, would you set a timeframe for selling each house? It seems to be it depends on the market, no? But as long as you have cashflow, I guess it doesn't matter that much, huh? Just wait until the time is right?

Thanks!!

__________________
Faith is taking the first step even when you don't see the whole staircase.
-Martin Luther King, Jr

Russ,
This thread made me sit up straight in my chair, because I have been scrambling over almost exactly the same issues in the past few months!!!

I live in a pretty up-and-coming section of NJ, and there are deals EVERYWHERE. (As I have said in the past, it is tricky however to make these deals cashflow, as the rental costs just don’t meet the mortgage/tax payments in the majority of cases).

HOWEVER…

It IS possible to get some of these deals to break-even, or come very close, and with a short-term “buy and hold” strategy I think that is a worthwhile risk. Now, I believe 100% in the idea you mentioned that money is made when you BUY, not when you sell. With that in mind, I would LOVE to secure another property at well below market value right now, and hold onto it for a year or two while this market straightens out! With the rental property I already own, I could set myself up for one HELL of a life-change in two years when I sell them all and move on!! (with a nice little bank-roll and “safety-net” in my back pocket to get started!).

The problem is getting financed! I was very lucky that my last deal closed at ALL, only because of a family member who stepped in as a cosigner at the last second. Without a co-signer, I wouldn’t have had a chance! (and that is WITH a 20% down payment, a 775 credit score, a very secure job, etc.). On paper, I appear to be so over-extended right now because I don’t have the rental management history yet, and along with my montly income/expense ratio, that is ALL my broker cared about. As reasonable and frustrating as it is, banks just ARENT interested in loaning to people with "dreams" of becoming RE investors. Downpayments arent the problem for me. Its PROVING that if #*$@ hits the fan, I will NOT default on that mortgage payment to them...and its frustrating as anything trying to figure out a way around that...

As much as I would LOVE to get into another property right now, I was told it would be near-impossible without going in with a partner, or until I can prove that I have succesful history managing rental properties. I just dont know where to go from here.

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-Mike
Building my stats one day at a time...

where do you live in NJ, and what type of deals are you finding?

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http://snowbank23.blogspot.com/

Snowbank,
Im in Warren County (Northwest corner), about 55 miles outside NYC. Prices have dropped ALOT from when I bought my first home in 06', and it driving me crazy to see how much more house you can get for your money NOW then I could have back then. In the Spring, I picked up an investment property about a mile from my own house at WELL below market value. I am currently renting to a few friends of mine while I sit on it and wait for this market to readjust. As mentioned, I would LOVE to pick up another one..but it seems as though the second one already pushed my luck and helped label me as "high-risk" to lenders. My monthly salary just dosent compare to my monthly expenses each month.

We'll see what happens I guess! Still working on a solution...

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-Mike
Building my stats one day at a time...

Richard Branson do that too. Uses cashflow from exisiting ventures to finance new ones.

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"Make as much as you can for as long as you can. Whoever has the most when he dies is the winner." - Lawrence Garfield in the movie Other People's Money