Relax, this isn’t some sales pitch for a revolutionary way to eliminate your credit card debt. As always, the way to solve any problem lies along the educational path.
The number one blockade to getting people onto the real estate investing wagon is their credit card debt. It affects all kinds of things, such as the amount you can ultimately borrow from banks. What we are going to do is take a look at the “expert” advice and tweak it to eliminate your debt in a fraction of the time.
Expert’s Advice: Pay as much as you can towards your biggest credit card. Pay the minimum amount due on all your other credit cards.
Cliff’s Advice: Pay as much as you can towards your biggest credit card. Pay the same amount due on all your other credit cards.
“Whatcha talkin’ about Willis?”
Let’s talk about your car loan. A bank loans you a certain amount of money, at a certain interest rate, and a loan term of X amount of years. “Five year financing with 2% interest” pepper car commercials. Home mortgages work the same way. Every month like clockwork, you receive a bill for the exact same amount.
Credit card companies loan you a certain amount of money at a certain interest rate but with no loan term. Your monthly payment is calculated based on a percentage of the balance. Normally between 2 and 4%.
Example: You decided to buy some expensive burial services for your pet for some insane reason and you have a credit card balance of $5,000 with an interest rate of 18% and a minimum payment due each month of 2.5% of the balance. Let’s run some figures.
Month 1: Using the evil credit card equation, your first payment due is for $125. $62.50 goes to interest and $62.50 goes towards the balance. So your new balance is $4937.50.
Month 2: Using the evil credit card calculator, your second payment is $123.44. $61.72 goes to interest and $61.72 goes towards the balance.
Wait! Last month, it was $125. Now it’s $123.44. What happened? I’m glad you asked. The credit card companies only charge a percentage of the balance (2.5%). As your balance goes down, your monthly payment goes down.
Take a look at what else happened. The amount of money you paid towards interest decreased. Month 1, it was $62.50 and Month 2, it was $61.72. Every month, less and less is applied towards the balance.
If we run the equation all the way to a balance of zero, look at the results over time.
Yes, that’s correct. Two hundred and fifty months to pay off this credit card. That’s 20 years. If you sum up the interest, that’s $4974. Nearly the same amount you started with.
For those who are still reading . . .
The secret to eliminating your credit card debt is NOT to pay the minimum due. Rather pay the same amount each month.
Using the same numbers as before, Month 1 payment is $125. We are going to change the rules and pay $125 for Month 2, Month 3, etc etc etc. If we run the equation until the balance equals zero, look at the difference.
Paid off the same amount of debt but only within 50 months. Not 250. And you can see the reason why. Each month, the amount you apply towards the principle is actually increasing. Not decreasing. Total interest paid is only $1,974, for a difference of $3,000.
What’s the secret?
If you act now, because we can’t do this all day, you can know the secret of clearing debt for only $99.99!
Just kidding. There is no secret. What you need to do is change the rules of the game. Don’t accept your credit card companies repayment plan. Substitute your own. Pay the exact same amount each month.
One last graph, comparing the balance between minimum monthly payments and steady payments. The results speak for themselves.
I love tax season.
No, I’m not sadistic nor am I certifiably crazy. Tax season means one thing: tax refund. Who doesn’t like that?
The return on this, usually between $4,000 and $5,000, is well worth it.
Preparing for tax season need not be complicated. I’m going to present you with my system, which has served me well over the years. Relax: no expensive software to buy nor is this a sales pitch. Actually this entire system is free. Maybe 5 minutes of your time each month.
Google offers users free access to their online spreadsheet program. This has been my best weapon at organizing all these expenses. As we all know, each spreadsheet is broken down into tabs. Each tab can be used for a single property.
The first section: Rent. Each month, I track when the check arrived and which unit paid. Since I keep a photocopy of each rent check, I don’t write in check numbers. Keep it simple.
Section Section: Repairs and Maintenance. The water heater breaks or the toilet requires snaking; whatever is broken is cataloged here along with how much it cost to fix and the date. The receipt from the store or the contractor is kept in my 2015 Expense folder. And the guys who come once a week to cut your grass? That counts too. Yard maintenance is key. I use Sugar Land property management team for a few properties, their fees, yup, deductible too.
Third Section: Upgrades. Did you have the property repainted? How about installing a new screen door? Those particular items aren’t repairs and qualify as upgrades. Your accountant decides which because repairs qualify as tax deductions today. Upgrades qualify as deductions upon the sale of the property.
At the bottom of each section is the SUM function, which turns everything into one number. Print this tab and take it with you to your accountant.
Any publication such as Barrons or Investor Daily can be a deduction. Your membership to the Landlord Association? Yep. Do you blog about real estate? Another deduction coming up!
Remember that one time, at band camp, when you had to buy a snake for the toilet? Those 15 miles you drove to Lowes counts at $0.35 per mile. That’s $5.25 and round trip, that means $11.50 you can write off. Make sure to log the date and time in your spreadsheet along with the mileage.
Your prefer Quicken to all this spreadsheet mumbo jumbo? The $70 is deductible. Now that your computer is involved, that probably gets to be depreciated as a business asset. How does that sound?
The more money you can attribute to your investment, the more you’ll get back in your refund. The standard rule of thumb is 40 cents back on the dollar. Let’s say that with all the repairs, maintenance, and other deductions you can write off $1,000.
That means you’ll get $400 back just on that part alone. This doesn’t even consider the interest paid on the mortgage not the depreciation of the property. Your accountant can take care of that.
Oh, and the $350 I pay the accountant? Yep, that is deductible too. I’ll get roughly $140 back.
Don’t forget about your property taxes too. Yup, deductible. And not only deductible, but sometimes even complete write offs.
When I first got into real estate investing, every real estate self-help book talked about starting with condominiums. They talk about finding one then laughing all the way to the bank. They always skip over the potential ugliness that can come with having a condominium. I never saw a story about Special Assessments that drove the cash flow negative for nearly a year.
Some investors recommend condominiums as investments due in part to their relative cheapness. Compared to buying a single-family home (SFH) or even a duplex, condominiums are cheaper. Are they really the better vehicle for investing?
Condos are typically cheaper to purchase than Single Family Homes (SFH). The biggest difference: a yard. Banks just love a property that stands on it’s own, surrounded by grass.
But that leads into the second benefit which is there isn’t a yard to maintain. The exterior of the actual condo is the responsibility of the Home Owners Association (HOA). They make sure the grass is cut, the pools are maintained, any public buildings are clean.
If anything public is affected and needs repaired, the HOA pays for it. For instance, if you and several other units experienced blocked plumbing, the HOA would have the plumber come out and fix the problem. Who pays the bill? The HOA does using your monthly fees.
As a rental unit, HOA fees are tax deductible. If not all then a portion certainly is.
No private yard usually translates into lower rents. Tenants do like to store things on the property. Broken down car, dog house, meth-lab and usually they are willing to pay a premium for it. Because of this, condos typically rent less than a SFH would.
As the house market fluctuates, condos are typically the hardest hit. When a market correction occurs, condos are the first to lose value and the last to recover.
Read the HOA agreement carefully. Several points:
– HOA fees can be increased year over year without membership voting. Either by a small percentage or a flat fee. Build this into your business model.
– Associations can decide if condos are used as rentals or not. They may decide to screen your tenants and give final approval. You’d have no say in the matter.
– Special Assessment will become two words you’ll hate to hear. The HOA may decide to install flamingo pink around the property. YOU have to pay for it out of pocket.
Choosing not to pay HOA fees or the Special Assessment may result in your property being confiscated or liens being placed against your property. A lien on your condo is a fast way to bring your investing career to a screaming halt. Your library card may even be revoked.
This is not to scare you from considering condominiums as a rental income machine. Many investors do it and are quite please with the results. Before jumping in, make sure to review the HOA agreements thoroughly along with your other documents during escrow. It is critical to ensure you are purchasing an asset, which will put money into your pocket rather than a money pit.
After buying your duplex, the monthly cash flow is around $175. After the honeymoon has worn off, one fact occurs to you: things break. One month, the tenant reports the shower head broke. The next month, the yard light has burned out. Not long after, the toilet is clogged thanks to someone’s Tonka Toy collection going for a swim.
Here are some tips to protect your cashflow from being eaten away by minor maintenance.
Tip #1: Gift Cards. With Christmas and the holidays approaching, what better way for your family to tell you they love you than with gift cards from Lowe’s or Home Depot. People may snicker at the idea but when you’re bleeding money each month the gift card concept sounds better all the time. Birthdays and anniversaries are also good times for gift cards.
So unless you really want that pink bunny suit from Aunt Mildred, play the guilt card and get your family into the gift card spirit.
Tip #2: Coupons. Still think that coupons are for little old ladies trying to save a dime on canned corn? Lose that notion. The next time you jump into your car to go to Lowe’s or Home Depot, print out a coupon for 10% off your purchase. If you have to replace that shower head, might as well save some money while doing it. Also using coupons make those gift cards from Aunt Mildred last that much longer.
Where to get coupons?
Change of Address: Every time you fill out a change of address card, a thick package of coupons arrive at your new address. Use them all!
eBay: Yes, everything is for sale. People sell packs of coupons on eBay for $10 or less. Buy from someone reputable and make sure your coupons have bar codes on them. I got burned once because my coupons were barcodeless.
Google: Go to Google and type in “Lowe’s Coupon” or “Lowe’s Online Coupon” and watch the sites appear. Most sites have links that allow you to directly print out a coupon to take. Other sites may require that a coupon be mailed to you.
Tip #3: Videos. Watching videos can save you money? Face it: you watch YouTube at work. Stop watching Ninja Cat and learn something useful.
Your tenant’s toilet is clogged. You worked that plunger until the bathroom floor was covered in water. Nothing. Before calling the $80 plumber, watch a video instead. Just because one technique didn’t work doesn’t mean another one won’t.
This happened to me. When the plunger refused to remove the clog, I almost called a plumber, Dreading the $80 service call and watching a butt-crack, I found a video talking about a plumber’s Auger. Spending $7 on an Auger sounded more appealing that an $80 plumber butt-crack so I did it. It worked.
Good thing to because a month later, the toilet got clogged again. Come to find out, the water pressure isn’t the greatest and it will require an occasional Auger to clear it.
Do you think a plumber should share that information with me? Each time I call, I’m handing him $80 for five easy minutes of work. I’d rather not.
At the end of the day, every investor wants to keep their cashflow coming. The higher the cashflow, the better. Don’t let trivial problems eat away at your money. One day, when you have dozens of rental units, your handyman can worry about those repairs. But until that point, don’t be afraid of a little elbow grease.
Would you pay someone $150 to send an email?
Whether you’re buying a duplex, condo, house, etc. the lender is always going to charge fees for giving you a loan. Not all fees are given to the real estate agent. The lender is going to make some money on the deal. They charge fees as well.
What’s involved with real estate closing costs?
Generally, anyone not directly working for the lender is going to be firm on their price. The Appraiser, for instance, charges a flat fee for their work. OK, fine.
But what exactly is an “Application Fee” and why do they want to charge $100 for it? If the lender says that its to process the application, why are they charging a Processing Fee of $400?
Why do they do this?
The Loan Officer-to-Lender relationship is similar to a Car Salesmen-to-Dealership relationship. Car salesmen make their money when the car is sold. Dealerships make their money by financing the car. The same applies with Loan Officers: their money is made when the deal closes. Lenders make their money by financing your investment.
To maximize their payout, Loan Officers charge for everything. Emailing documents, reading your application, grooming their dog. Then they charge a fee for that.
What can I do to protect myself?
If your lender begins to babble, talking about his tutu wearing pet monkey and yet cannot provide a clear cut definition of what each expense is and why each costs as much as it does, then you should probably avoid that lender. If you’re dealing in good faith, is it too much to ask that the lender deal in good faith as well?
Once you understand what everything is, start the negotiation process. Ask your loan officer if it really costs $150 to send an email. They may concede and knock $25 off the price. Twenty five dollars may not seem worth the effort. But once they start knocking $25 off from every fee, this can quickly add up to a few hundred dollars.
Is that worth your time?
If you want to be sneaky, tell your lender that you’ve been talking to a different lender and their closing costs are significantly less. You might get lucky and see some hoop jumping.
Once you have negotiated, get everything in writing. Then when you have your closing statement in front of you, compare the numbers. Did they live up to their agreement?
In the end, it has the potential to save you a few hundred dollars. This may not seem like much, considering you’re going after at $150,000 loan. But in the scramble to come up with funds, wouldn’t it be nice if the money you needed was suddenly just a little bit less?
Real Estate Networks are here to “help you”.
Yeah, I don’t believe that either…
The REI Networks advertise that they are around to help new investors build their real estate portfolio. Quickly. They hold free seminars, give you kool-aid and cookies, and then pound you into submission with a two hour infomercial with no bathroom breaks.
What goes on behind the scenes of these Networks?
These Networks provide everything to start investing. Real Estate Agents, Lenders, and Property Management companies. Guess how the Network makes money? By charging the Real Estate Agents, Lenders, and Property Management companies. That kool-aid you drank costs money. So it’s in the best interest of the Network that you buy something. Anything. But through their network.
They promise cashflow and a new house!
First, their calculation of cashflow is off base. Sorry but Rent minus Mortgage is not considered cashflow. Second the new house they are offering? It’s one of 50 new homes in a subdivision, all sold to new members of the Network. Do you think the Property Management company is going to be able to rent all 50 homes?
But they offer partners since I have no money.
Yes, they do. You and your partner sign an agreement, drafted by lawyers of the Network, and the rental property is yours. But who gets what in the deal? The partner gets 50% of the sales when the property is sold. They also claim the tax write-offs of the property.
What do you get?
You get to make the mortgage payment when the house sits empty, next to the other 50 empty houses. You get to scream at the answering machine of the Property Management company because they won’t pick up. You also get free kool-aid at the next Network seminar. In other words, the partner gets all the benefits and you assume all the risks.
Not necessarily. Look, people should expand their investment portfolios. If Networks can help, use them. But make sure to ask the tough questions. Don’t buy the “sales pitch” they give you. Put the kool-aid down and perform your own analysis.
Use the Business Modeler to analyze what the cash flow would really be. Also I would never buy “site unseen”. If the Network won’t allow you to do your own investigating, then seek help elsewhere.
Real Estate Clubs are a different story . . .
Definition of the word “club”.
For REI Clubs, a group of real estate investors getting together. Unlike REI Networks, Clubs won’t drill you with “buy buy buy” speeches. It’s probably a safe bet that their kool-aid isn’t spiked either.
REI Clubs allow you to network with seasoned investors in your area. These people know the ins and outs of investing, probably offer some guidance and advice. Ideally they could point you to good Real Estate Agents or Lenders. Legal affairs, such as evictions, is something they should know about.
Maybe a potential mentor or partner could be running around. Yes, do some networking.
Advice. Usually these clubs have experts that come in and give presentations about various topics. Tax planning, tax strategies, lending opportunities, other methods of making money in real estate . . . the list is endless.
I’m glad you asked.
One of the key benefits of these clubs is so that you never find yourself totally alone. If you have questions, seek out answers from people who know. So unless you’re vampire, allergic to sunlight and garlic, it may be well worth it to venture outside and check out one of these clubs.
As you try to gain an understanding of investing, you’ll probably be searching for the easiest route. The following article will help with that. The following facts will help you set up your investments in a much better fashion.
Always find out about the values of other properties in the area. Mortgages and rent in your local neighborhood could give you a better feel for the house’s value as opposed to its financial statements. When looking at things street level, you are able to make a better decision.
Always get an inspection before buying a house. Though the seller may offer to pay for an inspection, they might use someone who is biased. Make sure your report is neutral.
Learn from like-minded colleagues. Lots of people love the idea of investing in real estate. It is so popular that there are community groups about it. And besides groups within your city, there are plenty of forums online devoted to investing in real estate. Join these groups and learn all that you can.
When you’re trying to come up with a strategy for business, know that the costs that are sunk go further than a home’s general price. There are also closing costs and legal fees, among other things. When figuring out your margins, remember to include these costs as line items.
When buying real estate, it’s a great thing to have an affordable and trustworthy handyman by your side. Otherwise, you will spend lots on repair expenses. A reliable handyman is great for tenant issues that may arise during the day or night.
Consider hiring a company to manage your properties. While it will cost you some of your profits to do so, it can be worth the investment. They take care of checking out possible tenants and they also make arrangements for necessary repairs. This will allow you time to search for other properties to invest in.
Investing in real estate requires you to understand the neighborhood that it sits in. The property itself is important, but the location can be even more important. And you must know what the zoning laws are if you plan to use the investment location as a business. Speak to neighbors and get an idea about how quickly properties are rented in the area.
Never spend all of your money investing in real estate. The cash you place aside can be used in paying expenses such as rental property repairs. Another reason why it’s important to have cash stashed away is that you may not have enough money when you do not have renters. You still need to think about costs even when the property is sitting empty.
Do not purchase more than one property in the beginning. When you are new, you will simply want to get your feet wet. Instead, go with just the one, and keep studying until you know all there is to know. This will benefit you in the long run.
Determine whether you wish to make a long term or short term commitment to a property. How much money you need will be influenced by this. If you’re going to buy a home that is for fixing up, you have to think over how much the repairs will cost you when you work on the house. If you are planning on holding on to the property for a while, you can space out the repairs and renovations.
Your real estate investment education is going to cost you sooner or later. You can spend money on courses and/or time on independent research. Any number of pitfalls made along the way can cost you money. To avoid pitfalls, learn as much as you can prior to embarking upon your real estate ventures.
Real estate investing is not for anyone that gets scared easily. There is a lot of risk and negotiating involved. Though some properties are profitable easily and quickly, the business is often stressful.
Take care of repairs and improvements in a timely and efficient manner. Every little tasks affects how much money you ultimately make. Carefully plan everything that is needed before making the investment, and do not forget to include all the expenses. Any repairs that you decide to make on a property should either be essential repairs or those that help add value.
It can take time to locate a quality property that you can afford, but you have to have patience. The risky properties may look appealing and so might borrowing money, but avoid both. Look a little further out for your property. You may find your price range in the most unexpected places.
If you are fixing up a property to sell again, don’t make the improvements too unique. People have a specific way they want their new home to look, and it may not look the way you want to. Therefore, keep it as neutral as possible so most buyers can see ways to make their own mark upon it.
Get involved with investment forums online. This will allow you to learn from experts. You will be able to ask questions to professionals. They are generally full of support. This is a good way for you to get started.
If you are not careful with your cash, you will never have any to invest. Set a monthly budget limit and stick to it. You can settle for some extras, but be sure to focus on your goal. You won’t be successful if you’re too carefree with your spending.
Always understand what the projected minimum return is. Many times, people are told what they may make from an investment without being explained the risk. If you do not feel comfortable with the risks, invest your money elsewhere.
Don’t immediately invest the entirety of any windfalls you receive. It is best to make smaller investments over time. Put the rest in your bank account and find a other investments to make.
Investing is something you can do in your spare time, requiring just a little time and effort. Just use the advice you have read here to guide your efforts. You should find investing to be rewarding and even a bit fun.